Oil Shares Surge After Attack on Saudi Production

Saudi Arabia oil

Shares in listed oil firms rose on Monday after an attack on Saudi Arabian oil production facilities caused a spike in crude prices.

FTSE 100 giants BP (BP.) rose nearly 5% to 528p and Royal Dutch Sell (RSDB) shares rose 3% to £23.41. Shares in Tullow Oil rose nearly 10%, but that gain was largely due to a new oil discovery in the South American country of Guyana.

The attack on Saudi Arabia’s Abqaiq site has knocked nearly 6 million barrels of oil a day from the country’s 9.6 million a day production – and is believed to be the biggest disruption to oil output in history.

Brent crude prices surged 12% at the open on Monday, a gain of 20%, before falling back to a 9% gain to $66 per barrel. The US President said the country is preparing to release reserve production and Trump gave an explicit warning the country is ready to take military action against the perpetrators.

This is not the first attack on oil production this year: oil tankers in the Strait of Hormuz were attacked in June this year. Military action in Libya and political chaos in Venezuela also helped support crude prices at the beginning of 2019.

Rising oil prices often have a conflicting effect on stock markets: oil-focused shares do well initially, and they make up a large part of market-cap weighted indices like the FTSE 100 and S&P 500. But surging oil prices are generally bad for economies as they stoke inflation. The prospect of a conflict in the Middle East also comes at a bad time for the global economy, with recession fears growing. Despite gains in BP and Shell, the FTSE 100 is off in early afternoon trading.

Ian Forrest, investment research analyst at The Share Centre notes the stock markets overall have responded badly to the attacks: “Despite the lift for oil stocks the market overall was down, which perhaps reflects concerns that if there is a shortage of oil for any length of time, and the price remains high, it would further weaken an already fragile global economy.”

Morningstar believes that longer-term, the oil market will be less reliant on Middle Eastern supplies as more US shale gas production comes onstream. But short-term spikes are to be expected.

Analyst Mark Taylor says: "A higher geopolitical risk premium in the crude price could boost the near-term earnings for oil and gas companies in our coverage in accordance with a stronger Brent futures curve, which we use for our near-term estimates. But our mid-cycle $60 per barrel Brent crude price forecast (2022 dollars) for now stands, and changes to fair value estimates of the oil and gas stocks within our universe remain fairly minor.

"However, if the Abqaiq recovery is considerably more protracted than expected, or geopolitical tensions spill over into a greater supply disruption than currently, this situation could change."

Will Saudi Aramco Float Go Ahead?

The backdrop to these events is Saudi Aramco’s looming flotation, which has been beset by delays and personnel problems. In theory a spike in the oil price would help boost the valuation of Saudi’s state-owned oil producer. But the fact the attack happened on Saudi facilities has heightened the risks associated with investing in the country.

The IPO is set to be in two parts, the first sold to domestic investors and the rest to international buyers. But the venue of the international listing remains uncertain. And the Saudi government has recently replaced Khalid al Falih as both chairman of Aramco and as energy minister.

The country is represented in a number of UK listed funds focused on frontier markets. It became a full member of the MSCI Emerging Markets Index at the end of August, where its weighting was raised to 2.8%, boosting the amount of overseas investment in the Kingdom, which only opened to outside investors in 2015.

The Morningstar View

Oil prices fell back after Saudi Arabia said that supplies woul return quickly. Morningstar's Dave Meats is more cautious:

"The Saudis have been predictably optimistic about being able to partially restore production within days. However, a more realistic scenario is weeks and potentially months, given the complexity of the equipment and testing required, the release of US satellite imagery showing extensive damage, and the lack of even a preliminary assessment of the damage from the Saudis. The potential impact of the attack hinges on how quickly operations can be fully restored, and on whether the kingdom or its allies - including the US - choose to retaliate."

He adds that the attacks, depending on their impact on current global oil stocks, means the Morningstar estimate for the crude oil price is higher in the near-term. But the $55 per barrel long-term forecast for WTI remains, he says.