Why has the oil market taken the Saudi attack so calmly?
After an initial spike in the oil price, the market seems to have shrugged off the attack on Saudi Arabia’s oil infrastructure. John Stepek asks if it was all just a fuss over nothing, or if we could yet see some more big moves.
And yet, now Brent really isn't a lot higher trading at around $64.50 a barrel this morning.
Is this really all a big fuss about nothing?
An oil shock that fizzled out rapidly
When the news arrived about the drone attacks on Saudi Arabia's Abqaiq crude processing plant, the outlook seemed pretty bad.
About half of Saudi's oil output would have to be suspended. That amounts to more than one in 20 barrels of oil being knocked out of global production. That's a huge amount.
So why did oil end the week little more than 5% higher?
There are some reasons why the market might have taken the disruption more calmly than you might expect.
Firstly, while production has been hit, Saudi Arabia downplayed the length of the disruption. The Saudis rapidly claimed to have restored half of the lost production, and argue that output would be restored fully by the end of September (although full production capacity would not be available until the end of November).
So in theory at least, the hit was not as drastic as first expected.
To be clear, you have to take this with a pinch of salt. As the FT pointed out last week, the Saudis have good reasons to downplay the drama. You might think that they might welcome an excuse to drive the oil price higher. But they also have to present themselves as a reliable supplier of oil.
One problem these days is that, with the US an increasingly important rival energy power, Saudi Arabia and the older oil powers don't want to risk customers restructuring their supply arrangements.
Also, the Saudis are still keen to get investors to pay a high price for Aramco, the state-owned oil company. It won't look good for the IPO if one of the risk factors involves the relative ease of stopping production with a handful of drones.
So in this case, it definitely suits the Saudis to present a "glass half-full" picture. Others with knowledge of the damage "cautioned that the energy minister's statement was optimistic," notes the FT.
In reality, it's more likely that the damage isn't being fixed as quickly, but that Saudi Arabia has enough reserves to maintain the amount of oil hitting the market, and it can presumably top up those reserves once production is fully restored.
The other main reason for oil dropping off is simply the continued gloom around the state of the global economy. Manufacturing across the world is in recession. The consumer side of the global economy is tough enough to be able to shrug that off so far.
Oil might not surge soon, but it's hard to see it collapsing
So, on the one hand, you can see why the market has remained relatively calm after the initial spike.
However, there are reasons to believe that this equilibrium might be rather fragile.
There's the obvious issue even by the standards of the region, this has to ratchet up the tension in the area. For a start, Saudi Arabia and the US are both blaming Iran for the attack.
Secondly, if it's this easy to wreak havoc on the Saudi production network, then why couldn't it happen again?
Capital Economics while considering the scenario unlikely reckons that further attacks or even a "full-blown conflict" could drive the price of Brent "well above $100 per barrel."
Moreover, there's this question of there being "too much supply" in the market. There seems to be a lot of confidence that this is the case. And I have no specific reason to doubt this.
The main issue, though, is that experience tells me that the narrative on oil (and most other markets for that matter), can turn very rapidly. Get a few pieces of economic data that are more optimistic than expected or signs of a trade deal between the US and China and suddenly you might find that the oil market is a lot tighter than anyone had expected.
In short, I'm not saying that the oil price is going to rocket a lot higher from here. But the market does strike me as being psychologically geared to the downside, whereas I suspect it's a lot more likely that future surprises will be to the upside.
So hang on to your oil investments. As my colleague Merryn Somerset Webb pointed out recently, there could be a fair bit more value in these "stranded assets" still.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
Review: Eden Roc Cap Cana – fun, sun and golf in the Caribbean
Reeves delays cash ISA reform, but savers are not out of the woods yet
