The September 14th attack on two Saudi Arabian oil facilities is a clear shock to the system. As of today, Monday, 9/16, it appears that up to 50% of Saudi output, representing 5% of global supply, is offline. This morning WTI* crude prices are trading up 8%, which does not seem like much given the potential geopolitical ramifications of this attack. The market’s reaction to and interpretation of geopolitical events is completely unforecastable. Three observations come to mind:

  1. If this were to have happened 10 or even five years ago, before the United States was able to ramp up shale production, world markets would likely be reacting quite differently. U.S. oil independence is bearing dividends today.
  2. We often warn of exogenous events being the greatest threat to economic growth, and this weekend’s attack surely qualifies as one such event. According to news sources, global inventories are high enough to cover production shortfalls for some time, but the longer the outages persist, the higher oil prices will drift. J.P. Morgan estimates that a 50% decline in Saudi output lasting 30 days will push up oil prices by $8 per barrel. If it appears that production will be impaired for 90 days, the effect could be a $27 increase by the end of October.
  3. Global economic data has been weak, but stable. If the U.S. consumer believes a rise in energy prices is just a temporary shock, then we do not see this weekend’s events as having a lasting negative effect on economic growth. The Federal Open Market Committee will likely cut rates by 25 basis points this week. This weekend’s attack increases economic uncertainty and will likely lead to a more dovish tone in their accompanying remarks.

*West Texas Intermediate – used as a benchmark in oil pricing.