- A major affront on the world’s largest oil supplier has sparked geopolitical turbulence, but even more worrisome is the attack’s influence on the world’s stock markets
- Drone strikes over the weekend halved output at Saudi Arabia’s Abqaiq oil processing facility, triggering the highest spike in oil prices ever recorded
- The jolt in costs will impact oil and gas stocks, petrol prices and energy-focused industries like airlines
A major affront on the world’s largest oil supplier has sparked geopolitical turbulence, but even more worrisome is the attack’s influence on the world’s stock markets.
Saudi Arabia’s Aramco oil and gas plant fell victim to a crippling projectile strike last Saturday, triggering the highest spike in crude oil prices ever recorded. The price for a barrel of Brent crude jolted to US$69.02 overnight and was up 20 per cent yesterday from prices before the attack.
While rebel militia group Houthis has claimed responsibility, the recent attack has sparked murmurs of Iran’s involvement, further inflaming tensions with the U.S.
Although rebels claim they used 10 drones to carry out the strike, Saudi officials are unsure if these were the main projectiles, with multiple points of impact identified. One official from the kingdom said, “you can’t hit 19 targets with 10 drones like that.”
Both Saudi Arabia and the U.S. have vowed to continue researching the strike to determine who or what was involved.
As a result of the attack, the world’s daily oil production has fallen by five per cent. The Saudi plant’s processing capabilities has decreased by 5.7 million barrels a day, placing further pressure on overseas oil producers to pick up the slack and reinstate initial production rates.
What does this mean for the oil and gas industry?
Oil and gas could garner less investor attention following the jump in crude oil costs. The price hike has global impacts on the cost of fuel for motorists and the aircraft industry, further jolted by the strain between Iran and the U.S.
While the United States boasts the world’s largest backup oil reserve, the country is also one of the most volatile players in the imminent geopolitical game. President Donald Trump said his government was “locked and loaded” to respond to the attack, triggering global concerns about a potential war with Iran. Amidst rising tensions between the two countries, market analysts say the political climate could bring Australia to the forefront of the energy production game.
“Energy is energy whether it comes from oil or gas and the markets will take this opportunity to look at where else they can put their cash. The Middle East is an absolute powerhouse but look at Australia, it will become the biggest LNG exporter in a very short period of time. I think people looking at investing in these things will certainly take that into consideration,” said Warrego Energy Managing Director Dennis Donald.
The ASX’s energy portfolio enjoyed a four per cent jump yesterday after investors turned to home soil producers for securities. WA’s own Warrego Energy saw stock prices rise to 34 cents each, an increase of 9.6 per cent. The dual-listed Sundance Energy soared by 26.3 per cent to 24 cents apiece, while the nation’s largest oil and gas producer, Woodside, rose eight per cent to A$33.84.
How will fuel prices be effected?
Petrol prices could see a rise by as much as eight cents per litre following the drone strikes, and Aussie motorists have been warned that oil price hikes we’re seeing in the US could be mirrored over here.
“Every US dollar per barrel increase in the price of oil is basically a cent at the Australian petrol bowser,” said CommSec chief economist Craig James.
While Saudi officials said they were working to get back a third of the lost production capabilities by this morning, representatives said getting back to processing levels before the attacks could take months. Sources close to the kingdom’s oil processing operation said the restoration project was “unprecedented in scale and impact.”
Currently, crude oil is bought on a monthly cycle in Australia. If the Saudi plant isn’t brought back to its previous production capabilities (reversing the rising oil costs before the next purchase cycle) motorists could be hit with a further price hike.
What is the impact on airlines?
Industries who remain heavily reliant on oil and gas commodities will feel the effects of the price hike. Airline fuel costs are predicted to rise following the weekend attack, and the recent surge in crude oil prices could threaten the profitability of the world’s major airlines.
It’s a significant blow to the industry, with fuel costs accounting for roughly a quarter of the sector’s operating expenses. Shares in Spirit and American Airlines fell 33.1 and 6.7 per cent respectively following the strikes, and Australia’s own Qantas fell four per cent on Monday.
In spite of the share slump, investor Goldman Sachs said Qantas was well-positioned to continue operations amidst the fuel price hike.
“We believe Qantas is one of the best-placed global carriers to benefit from the recent volatility in global oil prices, given its: (i) fully hedged FY20 oil position, with downside participation; and (ii) strong track record of recovering fuel prices through effective capacity and price management,” said a Goldman representative.
Volatility in this market isn’t a new trend, with airline stocks continuing their downward spiral sparked by the ongoing trade war between China and the U.S. Airlines also faced heavy disruptions during the Hong Kong protests last month.
Of course, how the current geopolitical tension plays out will heavily impact whether crude oil prices continue their steady rise. Oil and gas stocks, petrol prices and energy-dependent industries will continue to be caught in the tailwinds of the price hike until the Saudi plant bounces back to its previous production levels.