I was still in the air with my wife, traveling between Dubai and our home in Florida, when some of the world’s most important oil production and processing facilities in Saudi Arabia were attacked by drones.
Only the timing was a surprise; I predicted this attack as recently as May, when I released a vetted-for-public-view version of a classified report on the vulnerability of Saudi oil infrastructure to attack, including the use of short-range missiles from Yemen.
By the time we landed, the massive Saudi Aramco processing facility at Abqaiq and the Khurais oil fields were burning, around 7% of global daily crude production was falling offline, and global crude prices were spiking by double digits.
At home, before I even had a chance to unpack, I participated in a marathon series of overseas conference calls which have only just ended.
With the attack, claimed by Houthi rebels out of Yemen, the long-simmering Saudi-Iranian proxy war has reached a new, volatile boil.
Frankly, White House rhetoric notwithstanding, Saudi Arabia’s next steps will largely determine when and where outright war breaks out.
I can say with certainty, however, that U.S. and Saudi government responses to the global oil market have missed the mark.
Here’s what’s really happening…
Here’s How Oil Will React in the Near Term
As I mentioned, global oil prices spiked by more than 10% in the hours following the attack. New York benchmark West Texas Intermediate was up some 11.64% yesterday, while London-traded Brent Crude was up around 11.9%.
Related: This small $6 U.S. defense firm with a new top-secret technology could help the Pentagon stop a Chinese sneak attack dead in its tracks. Read more…
We’re seeing spikes like this because, at a single stroke, the attack on Saudi Arabia’s infrastructure caused the biggest production disruption in history; around 5.7 million barrels per day of oil are now out of the picture.
By comparison, the 1978-1979 Iranian Revolution slashed 5.6 million barrels per day of production, and Iraqi dictator Saddam Hussein’s 1990 invasion and occupation of Kuwait did away with around 4.3 million barrels per day.
In a tweet on Sunday, the president revealed he has authorized a release from the U.S. Strategic Petroleum Reserve. The amount is “to be determined” but “sufficient to keep the markets well supplied”
We’ve seen similar pledges from the Saudis, but neither the U.S. nor the Saudi moves address the new dynamic suddenly at work in the market.
In other words, the volume available is not the issue; the price of that volume is. Economies all over the world have been relying on cheap oil. The attack, coming as it does at a time of global economic slowdown, serves to draw an uncomfortably bold line under that fact.
The continuing uncertainty now permeating worldwide global sales will increase the pricing floor; tapping strategic reserves will not address the pricing scenario.
As has been the case in the past when such releases were suggested or done, traders have made one thing abundantly clear: The availability of reserve volume will be factored into the calculation of futures contract pricing. Unless the new volume is continuous – not a possibility, given the sources – prices will not decline. The reserve access is simply factored in as part of the “new normal.” As soon as its availability is suspect, the price accelerates.
I’ve already sent detailed, step-by-step instructions to my subscribers on how they should position themselves to profit and protect themselves. In general, North American petroleum companies are well insulated from the spiraling Persian Gulf crisis – and they can make a significant contribution to picking up the expected shortfall, too. What’s more, leveraged crude oil exchange-traded funds make excellent speculative bets at a time like this.
Neil Patel Is One of the Most Successful Angel Investors in the World
Neil grew up cleaning toilets and emptying trash cans at a B-level theme park in Orange County. Not anymore, though. At this special event, Neil reveals how angel investing took him from making $5.75 an hour… to more than $20,000 per month… to now hundreds of millions per year. And he has indisputable proof that anyone can do this. The best part? You can start for as little as $50. Click here to learn more.
Follow Money Morning on Facebook and Twitter.
About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.To get full access to all Money Morning content, click here.
Disclaimer: © 2019 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.