Nirmala Sitharaman had probably expected that her impromptu Press Conference of Saturday, announcing one more stimulus would send the stock markets soaring when it opened on Monday. But what she did not pay attention to was the news coming in from the Middle East – the Houthi attack on Saudi’s Aramco facilities.
10 drones on Saturday conducted coordinated strikes on key Saudi Arabian oil facilities, among the world's largest and most important energy production centers. This has disrupted about half of the kingdom's oil capacity, or 5% of the daily global oil supply.
In a statement on Sunday, Saudi Energy Minister Prince Abdulaziz bin Salman said that 5.7 million barrels a day of crude oil and gas production have been affected. The latest OPEC figures put total Saudi production at 9.8 million barrels per day. That’s a HUGE impact.
The International Energy Agency, or IEA said that for now, markets are well supplied with ample commercial stocks but if the supply disruption continues for too long, the pressure on prices could rise.
Well, irrespective of what the IEA says, yesterday night in the international market, oil prices literally exploded, jumping up 20%, the highest jump in 28-years. USA stating that it will be using its emergency reserves has send the prices soaring.
Oil analyst say that should Saudi confirm that the outage will last for a few weeks, oil price could jump to $80/barrel. In fact commodity strategist Damien Courvalin at Goldman has put the various scenarios very succinctly – if the outage lasts for just a week, the price rise could be contained at $3-5/barrel; an outage of 2-6 weeks means a price rise of $5 to 14/barrel; if the outage drags beyond six weeks, price would rise to $75-80 at which level, an SPR release would likely be implemented, large enough to balance such a deficit for several months and cap prices at such levels. But if the outage lasts for more than three months, prices above $75/bbl to trigger both large shale supply and demand responses. But having said all this, it goes without saying that any retaliatory action could send crude prices soaring beyond $80 per barrel.
Needless to say, this will have an impact on India, being the oil guzzlers that we are. Imports during July 2019 were highest from Saudi Arabia worth $1.75 billion while the average price of the Indian crude basket for July was at $63.63 and in August at $59.35.
Saudi is expected to normalize operations very soon though the timeline is not yet known but many say it could be restored by next week. But currently, the oil traders are having a field day, turning from bears to bulls. They are the ones working up the fear mongering, sending the prices into a tizzy. There is already talk of prices rising to $100/barrel! That’s how sentiments are played up in such times.
So the price spike up in oil that we are seeing today is more on account of sentiments and whether or not the price rise will sustain will depend on Saudi releasing a statement, letting the world know the details of the supply outage along with mitigating measures.
For us, any price rise, even if for short time is bad, especially given the slowdown. But lets be assured that this is a temporary thing and by today or tomorrow, once Saudi issues a statement, prices will settle.