• Oil prices surge 20% on Monday open

  • Drone attack wipes off 5.7 million barrels of Saudi oil production

  • US administration blames Iran for the attack

This week was supposed to be centered on monetary policy decisions from the US, UK, Japan and Switzerland central banks, Brexit negotiations and developments in US-China trade talks. However, the weekend’s drone attacks on Saudi Arabia’s critical crude processing plant have now taken the spotlight.Such an event may have far more catastrophic consequences on theworld economy than any other event which hasoccurred over the past couple of years.

Oil prices soared 20% as markets reopened to trade near $72 a barrel but gave up half its gains five hours later.  The price shock seen today is the largest in almost three decades since Saddam Hussein invaded Kuwait back in the 1990s. Such a reaction in price suggests that we are currently facing an unprecedented threat to oil supplies that could reverberate through the global economy.

What we know so far is that the attack has caused a disruption of 5.7 million barrels a day, which is almost 5% of global oil supply. This makes it the biggest supply shortage shock in history. Now everyone seems to have the same question; when can Aramco return to normal production? Unfortunately, we don’t yet have a decisive answer.

The market has suddenly shifted from being oversupplied to undersupplied, and even if we combine all the spare global capacity available, thatwon’t make up half the current disruption. However, Saudi Arabia has a significant volume of oil in storage that will keep exports flowing and the US has stated it may even tap into its Strategic Petroleum Reserve if needed. This wouldsoften the damage to some extent, but again it’s all about when production returns back to normal. The longer the disruption goes on, the more damage willbe felt.

Three days ago, oil prices hitting $100 a barrel was almost an impossible scenario. Not anymore. That’s not just because of the current disruption from Saudi Arabia, but the fact that the chances of military conflict in the region have risen dramatically. US Secretary of State Mike Pompeo blamed Iran for the drone attacks, and Republican Senator Lindsey Graham said the United States should consider an attack on Iran’s oil refineries. Meanwhile President Trump warned that the US is ‘locked and loaded’. If such statements continue to flow from the US administration, geopolitical risk premium would increase significantly as any strike against Iran may put the whole Gulf region in jeopardy.

If investors begin pricing in the possibility of an attack against Iran’s crude infrastructure, oil may quickly hit the $100 benchmark. Nevertheless, if President Trump reverses course and allows Iran to export its oil, tensions will de-escalate, althoughcurrentlythis doesn’t seem to be the base case scenario. The next couple of days and weeks will be of incredible importance to the global economy and markets, so keep a close eye on further developments.

Disclaimer:This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 90% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD consolidating as markets digest the new US-Sino trade truce

EUR/UDS is trading around 1.1030, little changed. Markets are digesting the US-Sino handshake deal that prevents new US tariffs that were planned for Tuesday. Euro-zone industrial output is due out.

EUR/USD News

GBP/USD slips below 1.26 as Brexit talks drag

GBP/USD has kicked off the new week with a drop below 1.26 as Brexit optimism fades. Intense weekend talks have failed to result in an accord. Negotiations continue ahead of the EU Summit. 

GBP/USD News

USD/JPY consolidating bull rally into 108 handle on US/Sino trade deal optimism

USD/JPY starts out the week flat to Friday's close after markets rallied at the end of the week. Bullish geopolitical undertones in the form of a US/Sino 'phase 1' trade deal help lift USD/JPY onto the 108 handle.

USD/JPY News

Forex Today: Markets skeptical about US-Sino trade truce and sterling suffers a hangover as talks continue

Markets are cautious regarding the US-Sino partial trade deal. The world's largest economy agreed on a "hand-shake" agreement which is yet to be written. It includes a Chinese commitment to buy agrifoods.

Read more

Gold sellers cheer US-China trade optimism against all odds

With the US and China near to end the two-year-old trade tussle, Gold bears give little importance to doubts over soft Brexit and tension surrounding Syria while flashing $1,484.70 as a quote during Monday’s Asian session.

Gold News

Forex Majors

Cryptocurrencies

Signatures