By Jeffrey Halley
Oil futures leapt this morning by over 15% in a knee-jerk reaction to the attack on the Saudi Arabia Abqaiq oil facility over the weekend that notionally, took 5% of the world's supply offline. Brent futures spiked by 20% and WTI futures by 15% despite U.S. President Trump authorising releases from the Strategic Petroleum Reserve just before markets opened.
Saudi Aramco (ARMCO) has reduced the fallout somewhat by announcing today that over half of the 5 million barrels of production lost will be restored by tomorrow. The balance, however, will be offline for an indeterminate amount of time. The effect on Brent and WTI has been marginal though, both still over 10% higher than Friday's closes.
The attack was claimed by the Yemeni Houthi rebels, who claimed to have used ten explosive drones. The accuracy and sophistication of the attack on a facility over 500km from Yemen has led to speculation that Iran and not the Houthis were responsible. The United States is openly accusing Iran of being the perpetrator. Time and evidence will tell of course, but the security of Saudi Arabia's oil infrastructure will come under the microscope. Tensions in the Middle East are rising quickly, meaning this story will continue to reverberate this week even after the knee-jerk panic in oil markets this morning.
Hong Kong's violent protests escalated over the weekend, with protestors attacking more MTR stations and refusing to take the olive branch of Carrie Lam regarding the hated extradition law. Hong Kong Airport's arrivals numbers also collapsed, implying that the 100-day protests are starting to have a real economic effect. Oil ructions aside, investors would have already been nervous today in Asia as a belligerent China returns from holiday.
Swept from the headlines has been the frenzy of Central Bank rate announcements this week, with the U.S., Japan, U.K., Switzerland and Brazil all due to announce. Except for the U.K., I can see all of the other cutting rates or further easing to some degree.
Geopolitical tensions are likely to remain the centre of attention as the week begins with haven and resource currencies likely to outperform along with precious metals. The U.S. bond sell-off from last week continued in a knee-jerk fashion this morning. Is also unlikely to last as investors seek shelter from what is going to be a very rough week.
The Saudi Arabia attacks will likely torpedo Asian stock markets today with the S&P E-mini futures already lower by 0.62% to 2988, the Nikkei 225 down 0.77% to 21889 and the ASX 200 lower by 0.25% to 6651.
Resource-heavy Australia's markets are likely to tell a better story by the days end, than the rest of Asia-Pacific. Regional markets will likely be dragged lower, as ratcheting Middle East tensions and threats to oil supplies, weigh on imported energy-dependent Asia.
The ongoing violent protests in Hong Kong over the weekend will be a further knife through the ribs of the Hang Seng and are likely to cloud an already stormy outlook for Mainland China markets as well.
So-called Petro-currencies have all rallied this morning with the MXN, CAD, NOK, and AUD all outperforming. USD/JPY has also fallen 0.40% to 107.60 as investors pile into the safe-haven Japanese
Yen. The Swiss Franc has rallied for precisely the same reasons, USD/CHF falling 0.35% to 0.9867.
Regional heavyweights China, Indian, Taiwan and South Korean currencies are all likely to feel the full force of the spike in oil prices today, being massive net energy importers. Other regional markets will not be spared though as investors beat a retreat from more volatile developing markets.
The greenback has had a mixed morning overall then, but as my first Chief Dealer said, "always buy dollars in a war." With so many itchy trigger fingers across the globe today, and with the safeties switched to off, I would expect my Chief Dealer's sagely words to come to the fore this week as tensions skyrocket in the Middle East.
Brent Crude is 12.80% higher at $68.00 a barrel, and WTI is 11.30% higher at $61.00 a barrel as I write, having opened 20% and 15% higher respectively this morning. Knee-jerk reactions and thin liquidity aside, the overriding theme is the security of the Middle East's oil supplies.
Saudi Aramco's announcement today that half of the lost production will be restored by tomorrow, and President Trump's announcement of a release from the SPR, will go only part of the way to mollifying fears of further disruptions in supplies. If another state actor is proven to be the perpetrator and not Yemen's Houthi rebels, the region will almost certainly be facing, at best, a limited conflict.
The vulnerability of critical infrastructure and the threat of outright conflict between the region's oil heavyweights should mean that oil's downside today, and for the rest of the week is limited.
It was inevitable that gold would rally this morning as the Saudi Arabia attacks saw a rush a safe-haven buying. Gold has risen $20, or 1.30% to $1507.00 an ounce.
There isn't really much more to say in this respect, other than gold and silver should be significant beneficiaries of the expected rush to safety, and the impending rounds of central bank rate cuts this week.
Gold's longer-term support at $1480.00 has remained resolute in the face of sell-offs with the $1530.00 area the next significant resistance. A continued escalation of tensions, or a move into outright hostilities in the Middle-East, could see a $1600.00 handle sooner rather than later.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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