News & Views

Oil Update18 September 2019

Following the drone attacks on the Saudi Arabia oil infrastructure over the weekend, oil prices have risen significantly due to the disruption the attacks have caused. The surge in Brent crude prices of over 20% (which has now fallen slightly) was the biggest one day move in the commodity price for decades. Over 5% of the total global output has been put under immediate pressure, which has led to a drop in output of 5.7 million barrels from the largest oil producer in the world. From an economic perspective, oil is a major constituent for growth from both a consumer and exporters point of view and so these attacks will provide both a headwind and an opportunity, which is dependent on whether an economy is an oil consumer or oil producer.

The long-term ramifications on the oil price are currently unknown. However, the US has already stated that they can increase their production of oil and therefore cover part of the shortfall that these recent attacks have caused. Many economists have called out to OPEC to re-evaluate its shortfall in production and the committee may have to step in based on whether the disruption escalates further.

For many economists, the focus will now turn on the safety of oil infrastructure globally and whether more attacks like this can take place and produce further risks to the production, and therefore, the price, of oil.

Further escalation of tension between the US and Iran also looks likely, after the US has stated that they believe that Iran is behind the attacks. If this is proven true, then the US may step in and retaliate against Iran. This could be in the form of air strikes or military action. Any further escalation could lead to more volatility at a time where heightened volatility seems to be driving the sentiment of markets.

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