Attack on the Saudi Oil Fields – The Big One - September 18, 2019

Or is it?

Policymakers have fretted over a major attack on Saudi Arabia’s oil fields for decades. It finally happened on Saturday, with an attack knocking out 5.7 million barrels/day of production, or almost 6% of the world’s daily supply (WSJ).

  • Lost production may be fully restored within two to three weeks, Reuters reported on Tuesday. Other reports suggest it could be longer.

Is it really a big deal? Well, yes and no.

Saudi Arabia is the world’s number 3 oil producer behind the U.S. and Russia. An unprovoked attacked was launched against a key global oil producer. That’s a big deal.

While U.S. fracking production is nimble, it can’t be ramped up overnight. However, the U.S. is a major oil exporter today thanks to the fracking revolution.

Cushioning the blow, the U.S. Strategic Petroleum Reserve, and reserves in Europe, the Middle East, China, and Japan can ease any possible shortage. Russia and OPEC producers could also raise production.

Investor’s corner

In the past, we’ve heard talk that a significant attack on Saudi oil fields could drive prices up by $100/barrel.

Yet, on Monday, the price rose about $8/barrel, or nearly 15%, to $62 (MarketWatch). The Dow1 fell by 0.52%, and the S&P 500 Index2 lost a modest 0.31% (MarketWatch), i.e., not much market impact.

While tensions remain high, oil has been higher this year. A risk premium in oil is likely to linger, but $60 oil isn’t enough to derail the U.S. economy.