An attack on Saudi Arabia's largest oil processing plant pushed crude prices sharply higher Monday, though its longer-term impact depends on how long production is disrupted and the attack's future implications.
US crude oil jumped $5.61 per barrel, or 10.2 per cent, to $60.46 per barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the international standard, surged $7.84 per barrel, or 13 per cent, to $68.06 per barrel.
Yemen's Houthi rebels claimed responsibility for the attack on the Saudi Aramco facility. It halted production of 5.7 million barrels of crude a day, more than half of Saudi Arabia's global daily exports and more than 5 per cent of the world's daily crude oil production. Most output goes to Asia.
"To take Saudi oil production down 50 per cent, that's shocking," said Jonathan Aronson, a research analyst at Cornerstone Macro.
The attack may add to anxiety about the stability of the world's oil reserves. "Saudi Arabia has been a very reliable supplier of oil in the world," said Jim Burkhard, who heads crude oil research for IHS Markit. This attack is "adding a geopolitical premium back into the price of oil." That means oil prices would rise because of worries about more unrest hurting supply. Higher oil prices tend to hurt the economy as consumer costs rise.
Work is underway to restore production at the Abquaiq plant. The Wall Street Journal reported Sunday that Saudi officials said a third of crude output will be restored Monday, but bringing the entire plant back online may take weeks. Officials said they would use other facilities and existing stocks to supplant the plant's production.
The world's richest countries have oil reserves of more than 2 billion barrels, but releasing those to alleviate supply concerns could potentially backfire and result in higher prices on the market as traders worry that there is a problem with tight supply, he said.
While the US has a cushion because it and Canada both produce plenty, leaving the US less reliant on oil from the Middle East, it's still a global market. "If you take oil anywhere out of system it affects everybody," said Burkhard.
Still, the situation is better today than it would have been a decade ago, prior to the US energy boom.
If the plant goes back online and there is no fundamental change to the world's supply of oil, prices may move higher and stay higher because traders would build in a "security premium," said Michael Lynch, president of Strategic Energy & Economic Research.
