Analysts are this morning coming to terms with the implications of an attack on two Saudi processing plants after they pushed up oil prices as much as 20 per cent.
The price of Brent crude rose as high as $71.95 per barrel this morning, however its have since given back most of those gains, trading up around 7.8 per cent to $65.34.
However traders and analysts are still worried about the long-term implications, which could depend on a series of factors.
What will happen to oil prices?
The initial knee-jerk reaction of the market may have been a little misplaced, and prices have quickly corrected the huge jump we saw earlier.
While Saudi production took a hit over the weekend, this is only likely to be temporary, even if it takes weeks to get back to full capacity. Meanwhile high production in the US has been pushing down prices for months.
However Steve Wood, the managing director at credit ratings agency Moody’s, said that the price will “likely reflect a risk premium” even after production reaches pre-attack levels.
Where exactly the price will land is uncertain. Sam Wahab at SP Angel and analysts at UBS said the price could rise as high as $80 per barrel, although UBS said more data was needed before saying whether this is realistic. Neil Wilson at Markets.com said the price could reach that high if the outage continues for more than a month. David Cheetham at XTB said Brent could be pushed over the $70 per barrel mark, even as high as $75, if the outage is prolonged.
How quickly can Saudi Arabia get supply back?
Saudi Aramco, the state oil company, is already working hard to get production back running at the site.
The company has not yet released a timetable for when it will have restored all the 5.7m barrels per day that it lost in the attack – about half its production, and five per cent of global output. But two sources told Reuters that a full scale-up “may take months.”
But it could take some time for an actual shortage to hit the markets, as both Saudi Arabia and the US promised to tap into their not insignificant reserves. South Korea, one of the biggest importers of Saudi oil, also said it could release reserves if things got worse.
Will there be more attacks?
“If this can happen once, presumably it can happen again,” Callum Macpherson at Investec said this morning, referring to the attacks on the plants.
It is the second drone attack on Saudi oil infrastructure this year, and by far the more successful of the two in the eyes of the Houthis, who launched it. They warned this morning that Aramco infrastructure could be hit again at “any moment”. Saudi Arabia has led a bombing campaign against the Houthis in Yemen.
Meanwhile the attacks could spark retribution. The US has firmly pointed the finger of blame at Iran, which backs the Houthi forces.
US President Donald Trump said the military is “locked and loaded” to respond to the attack. It comes just a week after he fired his hawkish national security adviser John Bolton, which many saw as a thawing of relations with Iran.
“Clearly events of over the past few days fly in the face of de-escalation,” said Nitesh Shah at Wisdom Tree. “We believe the geopolitical-premium in oil will rise as the risk of military intervention in the region is growing by the day.”