One of the biggest stories both in the financial press as well as political news once again has to do with the oil markets. Saudi oil facilities were shut down after being hit by a drone strike that crippled the world’s largest oil processing plant as well as a major oil field.
The resulting fires ended up halting 50% of the country’s production, although Saudi officials said that they expect output to return to normal by Monday.
There have been a number of drone attacks on the Saudi Arabian oil infrastructure in the past few weeks, but this incident was easily the most damaging. Officials stated that they hope that production will return to the regular 9.8 million barrels per day, recovering in a two-day period what at first led to a significant shutdown of over 5.7 million barrels per day of estimated output.
The drone attack is supposed to have originated from the Iranian-backed Houthi’s, who control Yemen’s capital of Sanaa and also claimed responsibility for the attack. However, the 10 drones that they claim targeted the Khurais oilfield suggests a level of sophistication and scale that hasn’t been seen before from the Houthi’s.
Instead, the U.S. government quickly responded by dismissing the letter, arguing instead that this was an attack spearheaded by Iran. U.S. Secretary of State Mike Pompeo tweeting over the weekend that “There is no evidence that the attacks came from Yemen. Iran has now launched an unprecedented attack on the world’s energy supply.”
Over the past couple of years, the Houthi’s have sent dozens of drones and ballistic missiles against the Saudi’s. The vast majority have either been intercepted by air defenses or have fallen harmlessly, with barely a handful causing any minor damage. This attack breaks the pattern completely, leading experts to suggest that someone else was behind the incident.
In response to the news, oil prices jumped by 10%, the largest single-day move for the energy commodity this year. International benchmark Brent crude jumped to $71.95 per barrel at its highest point, although ended up stabilizing at $66.64 per barrel. West Texas Intermediate is also up 9.5%, hitting $60.06.
The last time oil prices shot up to geopolitical tensions was due to oil tanker attacks that had allegedly stemmed from Iran as well. However, oil prices shot up only 4-5% during the day the news broke out, nowhere near the 10-20% price swings seen over the weekend as investors responded to the attacks. While at this point it is uncertain what measures the U.S. and the Saudi’s will take, President Trump has already made several twitter comments on the matter.
“[We] are locked and loaded depending on verification but are waiting to hear from the Kingdom [of Saudi Arabia] as to who they believe was the cause of this attack and under what terms we would proceed!” he tweeted on Saturday.
Investors are asking themselves how long will this jolt affect oil prices and whether things will settle in the next week or two. Only time will tell how short or long-lived this spike in prices will be.