The record oil-price surge after a drone strike on a Saudi Arabian oil facility couldn’t come at a worse time for a world economy already in the grip of a deepening downturn.

While the severity will depend on how long the price spike endures, the development will further erode business and consumer confidence that already are fragile amid the U.S.-China trade dispute and slowing global demand. A manufacturing slump around the world is hammering growth in export powerhouses China and Germany.

“A negative supply shock like this, when global growth is in a synchronized slowdown with many geopolitical hotspots simmering, is just what we don’t need,” said Rob Subbaraman, head of global macro research at Nomura Holdings Inc. in Singapore.

• Crude prices jump most on record in the single worst sudden disruption to the oil market ever
• Attack on Saudi oil facilities knock out half the kingdom’s supply, raises prospects of US$100 oil
• Yemeni rebels promise more oil attacks to come, but ‘locked and loaded’ U.S. points finger straight at Iran

The oil shock comes amid a flurry of warning signs for the global economy. Data Monday out of China included the worst single-month reading for industrial output since 2002. In July, the International Monetary Fund reduced its global growth outlook — already the lowest since the financial crisis — to 3.2 per cent this year and 3.5 per cent next; a rate of 3.3 per cent or lower would be the weakest since 2009.

Variable Impact

The impact from the oil-price spike will vary around the world.

Emerging economies nursing current account and fiscal deficits — like India, South Africa and others — run the risk of large capital outflows and weaker currencies.

Exporting nations will enjoy a boost to corporate and government revenues, while consuming nations will bear the cost at the pump, potentially fanning inflation and hurting demand. As the world’s biggest importer of oil, China is vulnerable to rising crude prices, while many countries in Europe also rely on imported energy.

With inflation not an immediate concern in the global economy, the bigger worry is the effect a price shock will have on global demand that’s already weak.

“Inflation is not really an issue at the moment,” said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong. “But the production shortage and price increase will choke purchasing power and thus weigh on spending at a precarious moment for the global economy.”

Dovish Response?

An IMF analysis in 2017 found that a one-year, one-standard-deviation shock to oil supply — in which the oil price jumps more than 10 per cent — would erode world output by about 0.1 per cent for two years.

The news from Saudi Arabia boosts the chance of additional monetary policy support from central banks in anticipation of higher energy costs that are effectively a tax on consumers, David Mann, chief economist for Standard Chartered Plc in Singapore, told Bloomberg Television.

“We would argue this adds to the reasons why we are going to see more dovish surprises from central banks over the next few weeks,” Mann said.

The Federal Reserve is poised to cut interest rates again this week and their meeting will be followed by the Bank of Japan, which is under pressure from investors to loosen monetary policy further. Central banks of Brazil, South Africa, Norway, Switzerland and the U.K. will also decide policy this week.

In a hint of how emerging economy officials may react, Philippine central bank Governor Benjamin Diokno said the price shock will figure into policy makers’ discussions when they meet next week to decide interest rates. Bank Indonesia has a policy meeting scheduled Thursday, with the majority of economists surveyed before the Saudi attack predicting a 25 basis-point rate cut.

“A significant spike in oil prices is the last thing the world economy needs now,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors Ltd.

Bloomberg.com

The Trump administration has intensified its focus on Iran as the likely culprit behind attacks on important Saudi Arabian oil facilities over the weekend, with officials citing intelligence assessments to support the accusation and President Donald Trump warning that he was prepared to take military action.

The government released satellite photographs showing what officials said were at least 17 points of impact at several Saudi energy facilities from strikes they said came from the north or northwest. That would be consistent with an attack coming from the direction of the Persian Gulf, Iran or Iraq, rather than from Yemen, where the Iranian-backed Houthi militia that claimed responsibility for the strikes operates.

Administration officials, in a background briefing for reporters as well as in separate interviews Sunday, also said a combination of drones and cruise missiles — “both and a lot of them,” as one senior U.S. official put it — might have been used. That would indicate a degree of scope, precision and sophistication beyond the ability of the Houthi rebels alone.

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Trump, however, did not name Iran, saying he needed to consult with Saudi Arabia first.

The Saudi-led military coalition battling Yemen’s Houthi movement said on Monday that the attack on Saudi Arabian oil plants was carried out with Iranian weapons and was not launched from Yemen according to preliminary findings.

Coalition spokesman Colonel Turki al-Malki said that an investigation into Saturday’s strikes, which had been claimed by the Iran-aligned Houthi group, was still going on to determine the launch location.

“The preliminary results show that the weapons are Iranian and we are currently working to determine the location … The terrorist attack did not originate from Yemen as the Houthi militia claimed,” Malki told a press conference in Riyadh.

He said authorities would reveal the location from where drones were launched at a future press briefing.

Secretary of State Mike Pompeo said Saturday that Iran was behind what he called “an unprecedented attack on the world’s energy supply” and asserted that there was “no evidence the attacks came from Yemen.” He did not, however, say where they came from, and the Saudis refrained from directly blaming Iran.

The administration’s determination that Iran played a direct role in the attack marked a significant escalation in months of back-and-forth tensions between the United States and Iran. It raised questions about how Washington might retaliate — and why Iran would have risked such a confrontation.

Trump’s threat echoed one he made in June after Iran shot down a U.S. surveillance drone. He said then that the military had been “cocked and loaded” for a strike against Iran.

He said he called off the strike with 10 minutes to spare when a general told him that 150 people would probably die in the attack, which he said would have been disproportionate.

Administration officials said Sunday they would seek to declassify more intelligence to buttress their case against Iran in the coming days. The satellite photographs released Sunday did not appear as clear-cut as officials suggested, with some appearing to show damage on the western side of the facilities, not from the direction of Iran or Iraq.

American officials said that more than 17 weapons were directed at the Saudi facilities, but not all reached their targets. Forensic analyses of the recovered weapons could answer questions about what they were, who manufactured them and who launched them.

Iran forcefully rejected Pompeo’s accusation Sunday, with the foreign minister dismissing it as “max deceit.” The office of the Iraqi prime minister, Adel Abdul-Mahdi, also rejected any suggestion that Iranian operatives carried out the attack from Iraqi territory, saying Iraq would act firmly if its territory were used to attack other countries.

If Iran, or one of its proxies in Iraq or Yemen, carried out the attacks, it would fit into a strategy Iran has followed for months in its escalating confrontation with the Trump administration.

Squeezed by sweeping U.S. sanctions on its oil sales, Iran has sought to inflict a similar pain on its adversaries — threatening the ability of Saudi Arabia and other U.S. allies in the Persian Gulf to sell oil and holding out the possibility of driving up international oil prices in the months before Trump seeks reelection.

“Iran wants to show that instead of a win-lose contest, Iran can turn this into a lose-lose dynamic for everyone,” said Ali Vaez, head of the Iran Project at the International Crisis Group.

Yet Iran has stopped short of carrying out the kind of direct, open attack on U.S. allies that might trigger a military response, preferring to let regional allies do the work or at least share the blame.

“Plausible deniability is a trademark of Iran’s pushback strategy,” Vaez said.

The combination of military pressure and deniability also fits with a strategy of increasing Iran’s bargaining power before possible talks at the United Nations this month.

President Emanuel Macron of France has said he hopes the meeting of the U.N. General Assembly, which opens Tuesday, will be an opportunity for de-escalation between the United States and Iran. The recent hostilities began when the Trump administration withdrew last year from an agreement to limit Iran’s nuclear program and then this year imposed sweeping sanctions to try to force Iran into a more restrictive covenant.

Several other world powers, including France, also signed the original agreement and still support it, and Macron has said he hopes to hold talks at the General Assembly about saving the agreement. Trump said this month that he was open to a possible meeting there with President Hassan Rouhani of Iran.

Even as Iranian diplomats denied any role in the attack, others close to Iran’s elite Revolutionary Guard were reveling in the damage at the Saudi oil facilities, which process the vast majority of the country’s crude output.

The Trump administration, said Naser Imani, a former member of the guard’s political bureau, should take it as a warning to the United States and its Persian Gulf partners.

“If a few Houthis can cause this extensive damage, imagine what Iran could do if it was forced into a military conflict,” he said in a telephone interview Sunday. “Iran has proved in the past few months that it has the will to pull the trigger as well as the military power to do so.”

A military strategist with the Revolutionary Guard, speaking on the condition of anonymity for fear of retaliation, also questioned whether the Houthis alone could have carried out such a complex and effective attack without Iranian help.

But whoever carried out the attack, the Iranian strategist said, the message to the West and its regional allies was the same. If the United States strikes Iran, “the flames of war in the Persian Gulf will burn you all,” he said.

A senior commander for the Revolutionary Guard insisted that the country was ready for “full-fledged” war, the semiofficial Tasnim news agency reported, according to Reuters.

“Everybody should know that all American bases and their aircraft carriers in a distance of up to 2,000 kilometres around Iran are within the range of our missiles,” said Gen. Amir Ali Hajizadeh, the head of the Revolutionary Guard’s air force.

How the Trump administration responds remains to be seen. Breaking with a pattern under both Democratic and Republican presidents, the Trump administration has said that it intends to hold Iran fully responsible for any attacks carried out by the Houthis or other regional allies that the administration deems Iranian proxies.

Previous administrations have said that Iran was arming and training allied groups such as the Lebanese militia Hezbollah and Shiite militias in Syria or Iraq to extend its regional influence. Yet in the past, the United States has generally declined to retaliate against Iran militarily even when those groups have attacked the U.S. military, as Iranian-backed Shiite militias did during the U.S. occupation of Iraq.

With files from Reuters

CALGARY — High-precision attacks on critical Saudi Arabian oil infrastructure would compel major consumers of the commodity to diversify their energy sources to places like Canada, but the oilsands are suffering from their own geopolitical risks, according to analysts.

Global oil prices surged 14 per cent, or US$7.71 per barrel, to US$62.56 as markets reacted to rocket strikes on Saudi Arabia’s 5.7-million-barrels-per-day Abqaiq oil facility, which RBC Capital Markets managing director of global energy strategy, Michael Tran, called “the central bank of oil.”

Given reports of the damage so far, analysts believe Abqaiq – which represents 60 per cent of Saudi capacity – is likely to be offline for months. In response to the supply shock, Saudi Arabia is expected to draw oil from storage and the U.S. is preparing to dip into its Strategic Petroleum Reserve.

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As a result, analysts and economists believe the hit to global oil supply will amount to roughly three million barrels per day — enough to lift oil prices by as much as US$10 and also re-introduce a geopolitical risk premium to the oil market.

“Canada could, in theory, have been the first responder,” Tran said of the country’s ability to supply the global market.

Instead, Canadian companies are likely to enjoy the spike in oil prices through higher returns on their existing production levels but won’t be able to pump more oil to capture more of the upside because export pipelines are full.

“The Canadian energy industry remains hamstrung with other types of geopolitical risk,” Tran said, referring to the oil curtailment order in Alberta, delays on major export pipelines to the West Coast and U.S. Gulf Coast and restrictive regulations on new energy infrastructure.

Whitecap Resources Inc. president and CEO Grant Fagerheim said the attack on Saudi Arabia won’t change the company’s behaviour in the immediate term but it could help attract some investors that had left the country. Canada sits on the world’s third-largest oil reserves after Venezuela and Saudi Arabia.

“This could be an opportunity to alter the narrative a little bit about the stability of Canadian energy,” Fagerheim said, noting that Canada was once viewed by energy investors as a stable place to invest but investment dollars have migrated south to the Permian basin in Texas, which has been a major source of supply growth.

Whitecap is in the middle of setting its budget for 2020 and the attack on Abqaiq is likely to affect oil price assumptions for next year. Fagerheim said Whitecap is trying to “manage to the downside but expose ourselves to the upside.”

Some analysts believe the oil price response to the attack on Saudi Arabia actually understates the magnitude of the event.

To date, I’m surprised the price response is as muted as it is

RS Energy Group chief economist Judith Dwarkin

“To date, I’m surprised the price response is as muted as it is,” RS Energy Group chief economist Judith Dwarkin said, noting that U.S. President Donald Trump issued a statement indicating the country would use its Strategic Petroleum Reserves.

Dwarkin said that in recent months there have been smaller-scale production disruptions following violence in Libya and elsewhere but oil markets have “hardly quivered,” but the attack on Saudi Arabia is a much higher-magnitude event.

“This seems to suggest the Saudi’s can’t protect themselves against this kind of attack,” she said, which also demonstrates “heightened possibility there could be more in the near future.”

As U.S. and Saudi officials accuse Iran of perpetrating the attack, most economists and political analysts believe there could be additional attacks or escalation in the coming months.

“I don’t think we’re anywhere near done with this event,” said Scotiabank commodities economist Rory Johnston, adding the market is now grappling with the question: “Where do we go on the energy security side?”

Johnston said that most of the perceived risk in the oil market in recent years has been focused on the demand for oil – will oil prices fall as consumers use less gasoline and diesel? The attack on Saudi Arabia re-introduces the previously overlooked risks on the supply side – what happens to oil prices if there’s a major disruption?

You can’t ignore attacks on the largest petroleum facility on the planet … What happens next still remains an open question.

Rory Johnston, Scotiabank commodities economist

“You can’t ignore attacks on the largest petroleum facility on the planet, let alone the fact that this is the latest in a series of attacks on Saudi oil infrastructure,” Johnston said. “What happens next still remains an open question.”

Indeed, analysts at multiple investment banks upped their price targets on Canadian oil producers Monday morning and all cited the return of “geopolitical risk” as a reason why domestic producers could be more highly valued in the future. Share prices at multiple Canadian oil producers were up over 10 per cent on Monday, including Canadian Natural Resources Ltd., Cenovus Energy Inc. and Encana Corp.

“This is probably not the end of the situation in the Middle East, it’s probably only the beginning, and this risk premium, if we end up with a risk premium being built into the world price, that’s going to incent people to invest more to diversify production,” said Richard Masson, an executive fellow at the University of Calgary School of Public Policy.

Masson said the attack could lead to more investors putting their capital to work in alternative sources of oil supply.

“The rest of the world has had to sit back and watch as all investment went to the U.S. and into the Permian and now we have a situation where the deep offshore drilling hasn’t happened and there’s been a lack of investment including in the oilsands,” Masson said.

• Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan

The oil market is facing a prolonged disruption to Saudi Arabia’s oil production with few options for replacing such huge output losses.

The weekend attacks on the kingdom eliminated about 5 per cent of global oil supply, propelling Brent crude to a record surge on Monday. Officials at state oil company Saudi Aramco have become less optimistic on the pace of output recovery, telling a senior foreign diplomat they face a “severe” disruption measured in weeks and months and informing some customers that October shipments will be delayed.

JBC Energy GmbH

The historic price gain underscores the unprecedented nature of the disruption caused by the drone attack on the Abqaiq crude processing plant. For decades, Saudi Arabia has been the oil market’s great stabilizer, maintaining a large cushion of spare production capacity that can be tapped in emergencies, such as the 2011 war in Libya.

The halt of 5.7 million barrels day of the kingdom’s production — the worst sudden supply loss in history — exposes the inadequacy of the rest of the world’s supply buffer.

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“The market is in scramble mode to secure not only supplies of crude, but also products,” consultant JBC Energy GmbH said in a note. Prices are “reflecting a new geopolitical risk premium, namely that the safety of oil production in the heart of the Middle East cannot be guaranteed.”

Saudi Aramco is firing up idle offshore oil fields to replace some of the lost production, said a person familiar with the matter. Customers are also being supplied using stockpiles, though some buyers are being asked to accept different grades of crude. The kingdom has enough domestic inventories to cover about 26 days of exports, according to consultant Rystad Energy A/S.

U.S. President Donald Trump also authorized the release of oil from the country’s Strategic Petroleum Reserve, while the International Energy Agency, which helps coordinate industrialized countries’ emergency fuel stockpiles, said it was monitoring the situation.

According to Bloomberg calculations based on publicly available data, the absolute maximum in spare capacity that could be brought into production in the coming weeks is about 3.9 million barrels a day.

The true volume of viable backup supply could be significantly lower, because it includes restarting production from the Neutral Zone shared by Saudi Arabia and Kuwait, as well as tapping the kingdom’s own spare capacity, much of which may also have to be processed at the Abqaiq or Khurais facilities and therefore be unusable.

OPEC Capacity

Other participants in the OPEC+ cuts, such as Russia, Kazakhstan and the United Arab Emirates, could restore a few hundred-thousand barrels a day of production, not enough to offset the Saudi losses.

The Organization of Petroleum Exporting Countries is in regular contact with the Saudi authorities, the group’s Secretary-General Mohammad Barkindo said in a Bloomberg TV interview. It’s premature to talk about reversing the oil-production cuts implemented by OPEC and its allies, he said.

U.S. output may be booming, but the country’s many shale drillers hold little to no output in reserve. Oil production has plateaued at an average level of 12.37 million barrels a day since recovering from the impact of Hurricane Barry at the end of July.

Output will continue to grow and more than 10 new export terminals have been proposed for U.S. crude, capable of handling about 8 million barrels a day, but the first of these is unlikely to be operational before 2022 at the earliest.

Crude prices pared gains on Tuesday, following an extraordinary trading day in which Brent crude leaped settled a record 15 per cent higher at just above US$69. Futures were 0.3 per cent lower at US$68.80 a barrel as of 8:44 a.m. in London as the market waited for any further update from Aramco.

Saudi Energy Minister Prince Abdulaziz bin Salman is scheduled to hold a press briefing on Tuesday evening in Jeddah.

Images released of the damage to Abqaiq’s stabilization towers, which separate gaseous compounds from crude oil, suggest lengthy repairs, according to Phillip Cornell, a former senior corporate planning adviser to Aramco.

“They can take weeks or months to get specialized parts,” he said at an event hosted by the Atlantic Council in Washington on Monday. Five out of 18 stabilization towers appear to have been taken out and the pictures that have been released show “very specific, accurate targeting of those particular infrastructures,” he said.

In addition to the immediate loss of supply, the attack raised the specter of U.S. retaliation against Iran, which could further inflame oil prices. While Houthi rebels in Yemen claimed responsibility for the assault, President Trump said it looked like Iran was to blame.

“I don’t want to have war with anybody” but our military is prepared, Trump said at the White House on Monday.

Bloomberg.com