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Wall St closes weaker as oil price surges after drone attack

Fires over the oilfields

Wall Street stocks closed weaker on Monday after a drone attack on two Saudi Arabian oil facilities sparked fears that a surge in crude prices could further erode the global economy.

The Dow Jones Industrial Average closed down 0.52% and the Nasdaq Composite ended the session 0.28% weaker. The S&P 500 was 0.31% firmer.

Oil prices surged after the attacks on Saturday which affected more than half the kingdom’s daily output. But moves by other producers to increase supply helped pare back prices.

After an initial 20% gain to $71.95 a barrel – a four-month high – Brent Crude was up 12.97% at $68.03 per barrel. West Texas Intermediate soared 12.76% to $61.85 per barrel.

Authorities battled huge fires after Yemen’s Houthi group were reported to have used drones to target the world’s biggest processing facility in Abqaiq as well as the Khurais oilfield. They were later identified as being sourced from Iran.

About 5.7m barrels a day of crude – more than half the kingdom’s daily production – was affected, accounting for 5% of global supply.

The attacks prompted speculation that the price could hit $100 a barrel and may also delay flotation of Saudi Aramco, the state-controlled oil giant.

US authorities blamed Iran for the attacks while President Donald Trump authorised the release of US reserves, allowing the price to stabilise.

Russia’s energy minister Alexander Novak said that he planned to have a phone call with his Saudi counterpart.

He said there is enough oil in commercial stockpiles worldwide to cover the shortfall of supplies from Saudi Arabia.

In a statement on its website yesterday, Saudi Aramco said emergency crews contained fires at its plants in Abqaiq and Khurais, “as a result of terrorist attacks with projectiles”. These attacks resulted in production suspension of 5.7 million barrels of crude oil per day.

After visiting the incident locations, Amin H Nasser, Saudi Aramco president and CEO, said: “We are gratified that there were no injuries. I would like to thank all teams that responded timely to the incidents and brought the situation under control. Work is underway to restore production and a progress update will be provided in around 48 hours.”

Saudi energy minister Prince Abdulaziz bin Salman said some of the fall in production would be made up by tapping huge storage facilities.

Market reaction

Russ Mould, AJ Bell investment director, said: “Whoever arranged the attacks on Saudi Arabia’s oil infrastructure knew what they were doing, as the assault came straight after Riyadh had appointed the syndicate for the stock market flotation of its national oil company, Aramco, and US President Donald Trump had sacked his most aggressive foreign policy adviser, John Bolton.

“OPEC and some non-OPEC members, notably Russia, have been holding back production, so there will be some slack in the system. In addition, American oil inventories stand at around one billion barrels of oil, including 644,000 barrels in the Strategic Petroleum Reserve, which the US is saying it is happy to tap to help keep oil prices under control.

“This does suggest that oil prices may not be ready to rip higher. Equally, this is not the first attack on Saudi Arabian facilities and it is unlikely that too many oil traders will want to be short of crude, or equity traders short of oil stocks, in the current environment, so the commodity and share prices may find themselves well underpinned, at least in the short term.

“If oil were to make further big gains for any reason – such as another attack – then that would be a potential danger to the global economy and financial markets.

“The experiences of the 1970s show the financial damage that could be done. The oil price shock of 1973-74 tipped the world into recession and sparked off a bout of inflation that took nearly eight years to tame.

“While some oil-exporting and shipping-exposed nations would possibly benefit from higher oil and gas prices, history suggests that the extra cost borne by corporations and consumers in the West would be a substantial brake on economic growth. 

“On six of the last eight occasions when oil prices have risen by more than 100% year-on-year, global economic activity has slowed, or even tipped into recession.”

UK economy slipping

The British Chambers of Commerce has downgraded growth expectations for the UK in 2019 to 1.2% (from 1.3%) and to 0.8% (from 1.0%) for 2020. Its GDP growth forecast of 1.2% remains unchanged for 2021.

While the business group believes the UK economy will avoid a technical recession and return to modest growth in the third quarter, downgrades to its GDP growth forecast for 2019 and 2020 reflect a weaker outlook for investment, trade and productivity.

Business investment is now forecast to decline by 1.5% this year and by 0.1% in 2020, which together with the decline of 0.4% in 2018, would be the longest period of sustained full-year declines in business investment for 17 years.

UK productivity is projected to be more subdued than in the BCC’s previous outlook and implies that by the end of 2020, the UK economy will have experienced its weakest decade of average annual productivity growth on record.

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