Regulator : asic

Oil Markets Surge after Drone Attack on Saudi Oil Plant

September 17, 2019 16:57

On Saturday September 14, a swarm of explosive drones attacked the world's biggest oil processing plant in Saudi Arabia, reducing global oil production by 5 million barrels a day.

This accounts for nearly half Saudia Arabia's current output and 5% of global production, triggering a record surge in oil prices. Brent Crude Oil spiked from 60.42 on the evening of September 13 to 72.19 at market open on September 16 - a jump of 19.4%. Over the same period, WTI Crude Oil leaped 15.5% - from 54.79 to 63.28.

Other markets were also affected, with the USD/CAD gapping by almost 70 pips and Gold gapping $16 on the market open.

According to Bloomberg, this is the biggest oil production disruption in history, as Saudi Arabia continues the race to restore production.

What Happened?

Houthi rebels in Yemen claimed responsibility for the attack, where 10 explosive drones were fired on the Khurais oil field and Abqaiq oil processing facility. According to the rebel-run Saba news agency, the rebels had 'intelligence cooperation from people inside Saudi Arabia' when launch the attack.

While Saudi Arabian oil fields have been targeted by rebels over the past year, analysts have said that this was the largest and most successful attack to date.

Unsurprisingly, the attack has raised tensions in the Gulf, with US intelligence claiming that Iran's government was behind the attack, issuing satellite images as evidence.

For many national security teams, this attack is a signal of the next phase of modern warfare - where inexpensive drone devices are able to pierce defences when traditional airforces cannot.

What's Next for Oil?

The attack cut world output by over 5%, removing 5.7 million barrels per day from Saudi oil production.

And the reaction from the market is clear - with spikes of 15-20% for both WTI and Brent Crude oil taking place at the market open this morning:

Source: WTI CFD price chart - September 9, 2019 - September 16 - 2019 - Accessed September 16, 2019 11:25 EET

Source: BRENT CFD price chart - September 9, 2019 - September 16 - 2019 - Accessed September 16, 2019 11:25 EET

In this case, had a trader opened a long trade on one lot Brent at 1:10 leverage at 60.42, and closed it at the high of 72.19, they would have made a profit of EUR1,063. If they'd opened a short trade at the high and closed once the price dropped back to 66.42, they could have made a profit of EUR521.

The big question is, what's next for the oil markets?

An expert for S&P Global Platts has said that the attack would effectively wipe out the world's spare oil capacity, meaning that global consumption of oil cannot be maintained if Saudi Aramco can't restore production quickly.

Meanwhile, Robert McNally, of the US-based Rapidan Energy Group, said: 'Abqaiq is perhaps the most critical facility in the world for oil supply. Oil prices will jump on this. If disruption to production is prolonged, a Strategic Petrol Reserves release from International Energy Agency members seems both likely and sensible. If anything, the risk of tit-for-tat regional escalation, which pushes oil prices even higher, has just gone up significantly.'

If supply can be restored quickly, oil prices may return to their usual ranges. If not, demand will continue to outstrip supply, along with increasing the likelihood of conflict in the region, which could mean price climb even higher.

In either case, we should be prepared for further volatility in both WTI and Brent Crude Oil. Volatility creates opportunity for traders - especially CFD traders, who can benefit in both rising and falling markets by trading long and short. However, keep in mind that with volatility comes risk, so it's important to have proper risk management in place for any trade.

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