A major terrorist attack which wiped out half of Saudi oil production and sent oil prices soaring by record amounts has pushed up London’s energy companies this morning.
BP and Shell led the FTSE 100 risers in early trading after an attack by Yemen’s Houthis knocked out half of Saudi Arabia’s supply, of 5 per cent of global production.
“The attacks led to the single worst sudden disruption ever for oil markets, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbour,” analysts at Deutsche Bank said this morning.
The news was a major shock to international markets, hitting stocks globally, and pushing up the cost of Brent crude by as much as 20 per cent to $72 this morning. It was the biggest daily rally since Brent futures started trading in 1988.
The benchmark has since given back some of its gains and is trading up 7.5 per cent at the time of writing.
The Houthis, an Iran-backed fighting group fighting in the Yemini civil war, said it will continue to launch attacks on Saudi Arabia’s oil facilities.
The drone attack ripped through two plants run by state oil company Saudi Aramco over the weekend. The Houthis, who face an air campaign from Saudi Arabia, said the Kingdom should stop its “aggression and blockade on Yemen.”
What do the markets say?
Global markets were depressed this morning on the back of the news and weak economic data out of China, with the FTSE 100 down 28 points, or 0.38 per cent.
Meanwhile stocks in Asia were impacted by both sets of news, and the pan-European Stoxx 600 fell 0.6 per cent.
Oil shares boom
But London was pushed up by the oil majors, with oil majors BP and Shell, and several smaller players, rising strongly.
Tullow Oil, a North Sea explorer, enjoyed one of the biggest gains at 8.50am at 7.8 per cent, while Enquest rose 9.7 per cent and BP jumped 3.4 per cent.
- Enquest +9.74 per cent to 20.84p
- Premier Oil +8.13 per cent to 92.28p
- Tullow Oil up +7.8 per cent to 239.6p
- Wood Group +5 per cent to 433.7p
- BP +3.4 per cent to 521.7p
- Centrica +1 per cent to 576.2p
But a bad journey for some
Meanwhile airlines, which are reliant on buying, rather than selling, fuel, were down. initially part of the top fallers on the London exchange, they later regained some ground. Cruise line operator Carnical also fared badly in the face of the new price rise.
- Carnival -3.2 per cent to 7,735p
- International Airlines Group -1.75 per cent to 449.3p
- Ryanair -1.64 per cent to 10.22p
- Easyjet -1.33 per cent to 1,041p
“The last thing the beleaguered travel sector needs is sustained higher oil prices so it’s no surprise that airline stocks have come under pressure in early trade,” said Michael Hewson, an analyst at CMC Markets.
What happens next?
The Saudis are already ramping up production after losing 5.7m barrels per day of capacity. However according to reports it could take weeks for weeks to get production back to normal levels.
Saudi Aramco this morning started telling its clients that oil was being loaded back onto ships as usual, sources told Reuters.
But regardless of how quickly they come back online, the markets will still price the added risk into the cost of crude oil.
“Immediate price action will depend heavily on the extent of the outage – more than a month and you start to look at Brent north of $80, said Neil Wilson,” an analyst at Markets.com.
“If operations do come back online quickly, say within a week, the market pricing will reflect only the added risk premium, which though significant, is several degrees of magnitude less than a lasting outage.”
Meanwhile other analysts raised concerns that this could have a knock-on impact on a fragile global economy already hit by the trade war between China and the US.
“Spikes in oil prices when the global economy is already flirting with the idea of recession is not ideal and, if repeated and sustained, could ultimately be what tips us over the edge,” said Craig Erlam at Oanda.