FLASH-Global Crude Oil Market Disruption; Brent Posts Record Price Jump Overnight

Drone strike on Saudi Aramco oil facilities could lead to 50% of production taken offline

The latest in a series of attacks on Saudi Arabia’s oil infrastructure has significantly damaged its Abqaiq and Khurais facilities. Brent Crude Oil futures began trading Sunday night at an almost 20% premium to Friday’s closing price. Although the assessment of supply disruption is likely to be fluid in the next few days, initial estimates are that 5-6% of global output has been temporarily lost, at a time when Saudi crude exports are already nearing a 2-year low. “This is a historic event and may have ramifications for years to come,” according to The Price Group’s energy analyst Phil Flynn. “How can Saudi Arabia secure their oil fields in the future? We may now find how quickly shale can ramp up. I’m afraid it won’t be fast enough.” The security of energy supplies in the region, a perpetual but largely background geopolitical concern, is once again a forefront risk, with market implications that investors must proactively manage. Although not widely reported, this latest attack follows at least 5 previous targeted assaults on Saudi Arabian energy properties and facilities in the last 4 months alone. The specter of additional potential production disruptions will likely linger over the global crude oil markets for some time to come, resulting in a more persistent “geo-premium” to the price of crude oil.

Commodities Capture Crisis Alpha

This is one of the important reasons to own commodities – the ability to capture crisis alpha, the higher prices that result from productions, distribution, or supply shocks due to exogenous events. As we noted in a previous Investment Commentary (Event Risk and Crisis Alpha), the market response to global event risks (geopolitical, natural disaster, unexpected inflation, etc.) is almost always favorable to hard assets, and frequently penalizes financial assets. Allocating even a small portion of portfolios to commodities helps immunize against these events, and positions investors to capture outsized return opportunities.

 

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John Reese