The biggest oil-supply disruption in history has upended the entire energy market. These 3 drivers could dictate what happens next.

The biggest oil-supply disruption in history has upended the entire energy market. These 3 drivers could dictate what happens next.

oil worker driller flare

Nabil al-Jurani/AP

  • Attacks on Saudi Arabia's oil-production facilities over the weekend triggered the biggest-ever disruption to the commodity's supplies.
  • The attacks also revealed how vulnerable investors had become to a geopolitical shock stemming from the oil market.
  • Helima Croft, the global head of commodity strategy at RBC Capital Markets, outlined three realtime indicators investors can use to understand the unfolding implications of the Saudi situation.
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Over the weekend, Saudi Arabia suffered what we now know to be the largest disruption to crude oil supply in history.

Drone strikes on the Kingdom's facilities erased 5% of global supplies and crippled an estimated 5.7 million barrels per day in output. That's a bigger disruption than the combined fallout of the Iraq War and the Suez Crisis of the 1950s, according to data compiled by Bloomberg. US officials have blamed Iran for the strikes.

The attacks also triggered the largest single-day spike in oil prices on record. Brent crude oil, the international benchmark of oil prices, jumped by 20% when trading reopened on Sunday.

Beyond these epic consequences, the attacks exposed the vulnerability of Saudi Arabia's longstanding infrastructure, which once gushed more oil than any other country. And by extension, they have introduced a new source of geopolitical uncertainty for investors already grappling with the trade war.


"At a minimum, the attack is a key reminder that the geopolitical risk premium, which has long been absent, should make a pronounced return back into the market," Helima Croft, the global head of commodity strategy at RBC Capital Markets, said in a note to clients.

Citi strategists reckon that investors had been complacent about geopolitical risks stemming from the oil market. Crude should have been $10 per barrel higher than it had been for several months, said Ed Morse, Citi's global head of commodity research, in a note to clients.

Even after the historic jump in Brent crude oil, Goldman Sachs analysts estimated that prices could soar by 12% if the supply disruption persists for up to three months.

These forecasts and the price action already seen this week underscore the new source of uncertainty investors are confronted with.

Read more: Traders are overlooking a warning sign that flashed before the last financial crisis. Here's why one market expert says that means another recession is 'imminent.'


3 signals for what happens next

Further increases to the price of oil have far-reaching implications beyond the commodities market.

Shares of US oil producers surged - several by more than 10% - in early trading on Monday. The broader equity indices fell as investors fled risky assets for traditional safe havens like gold and Treasuries.

"While Aramco officials have suggested that exports may restart within days, there is a high degree of ambiguity around timing, extent of damage, coordinated supply response measures and the impact on investor sentiment," Croft said.

In the coming days, these three "realtime" indicators from Croft could help investors determine the impact of the Saudi attacks.

1. Demand from Asia: About 75% of exports from Saudi's national oil producer are delivered to Asia, and China is the Kingdom's largest trading partner.


Going forward, the best real-time gauge of tightness in the oil market is demand from Asian countries including Japan and Korea, according to Croft. She expects them to lean more on US and West African exports while Saudi gets back to speed.

2. Other types of crude oil: Iran and Venezuela were already tight on so-called sour crude oil that contains a higher amount of sulfur. The drone strike has knocked out a good share of Saudi's output of this grade.

The light, sweet crude oil that is most in demand was compromised too, and makes up 66% of aggregate Saudi production.

The latest shortfall can wreck havoc on global trade patterns, as refiners who need a specific kind of crude may struggle to find the amounts they require, Croft said.

3. Refinery margins: Global refinery margins have been trending lower over the past year, suggesting that demand for oil was softening.


Under normal circumstances, supply outages are seen as bullish for refiners. However, the market has never seen any disruption like this.

Ultimately, Croft said, a rise in oil prices must be accompanied by higher demand for derivatives like gasoline in order to benefit refiners. If demand stays dormant, a jump in oil prices could be devastating for refiners.