The attack on the Saudi oil facility over the weekend will increase half the Saudi oil production. The issue is how long will it take them to get back to normal production levels is the most critical unanswered question. We don’t know how much damage has been done to the facility, and I expect it will be challenging to get a true damage assessment.
This attack would have been more devastating had America not have moved to the biggest producer of oil in the world. Imagine what the price of oil, which at the time of the writing was $61.00 per barrel, would be if we were still importing 65% of our energy needs for the Middle East?
Some of the world stock markets are off close to 3% overnight because an interruption in the oil supply could devastate many nations economies. The decline in the American equity markets was minimal, and I would not expect a deep sell-off in our markets. The lack of a significant decline on Wall Street shows the strength of American oil.
Many of the world’s biggest economies are heavily dependent on Middle Eastern oil. China imports over 65% of its energy needs from the Midlist. Germany has wind and solar but still imports a significant amount of oil and natural gas. One important question if the outage extends then those that have the oil will be a force to play judge and jury on who gets how much if any?
Higher oil prices, if the extend for a significant period of time, will add to inflation and the world could we see a recession. The oil producers who have enough supply to not only run their economies but can export oil will have less of a downturn. America is now producing about 12 million barrels a day and exporting 4 million a day. I guess that if the shortage continues then look for President Trump to encourage increasing America oil companies to produce more to help the world.
Let me take a moment to talk a little about the nature of the attack, this was not land troops or ICMB but drones. At the moment we do not know if they were manned or unmanned aircraft. My guess that they were unmanned aircraft and controlled from somewhere else perhaps thousands of miles away. If any of the drones were shot down and were recovered, then we may be able to find out for sure who fired them and just as important who built them.
If a route begins in the world markets from Monday on with the Fed meeting on Wednesday look for them to raise concerns that should the oil shortage extend it may indicate that it will provide liquidity to the bond markets.
A couple of other things to watch out for early in the week, the price of gold and the yield on 90-day T- bills to fall as there will be a demand for a safe harbor and America is the best place to have your money.
The Perkins Twist, Discussion of the Saudi oil company sale will get postponed because the attack will make Sadie oil more vulnerable. Second, those companies who will be effected with a short supply of energy may want to take a look at America as a more stable energy market and wish to consider relocation their businesses to America.
So for the week follow American crude and see if it goes higher than Brent, gold, and last but not least the yield on the 90-day bill.