Global markets hit by oil supply shock

Milan — Oil prices climbed to four-month highs on Monday and world stocks slid after weekend attacks on crude facilities in Saudi Arabia shut about 5% of the world’s supply and fuelled worries over the impact of an oil shock on economic growth.

Brent crude futures rose nearly 20% at one point in their biggest intra-day gain since the Gulf War in 1991, and US futures jumped almost 16%, both hitting their highest level since May. But prices came off their peaks after US President Donald Trump authorised the use of the country’s emergency stockpile to ensure stable supply.

By 8.23am GMT, Brent futures were up 8.75% at $65.49 a barrel, while US light crude was up 7.8% at $59.13.

The upheaval in the oil market and poor economic data from China bolstered investors’ demand for safe-haven assets, pushing the Japanese yen and Swiss franc higher and sending core eurozone bond yields lower.

World stocks halted a four-day winning streak and were down 0.16%. European shares fell 0.55% and Wall Street signalled a weak start, too, with E-Mini futures for the S&P 500 off 0.34%.

The surge in crude prices comes at a time when central banks in the US, Europe and Asia are easing monetary policy to fight a slowdown in the global economy amid a drawn-out trade war between Washington and Beijing.

“Spikes in oil prices when the global economy is already flirting with the idea of recession is not ideal and, if repeated and sustained, could ultimately be what tips us over the edge,” said Craig Erlam, analyst at Oanda in London.

Data from China further underscored worries about the slowdown in the world’s second-biggest economy. Industrial production grew at its weakest pace in seventeen-and-a-half years amid rising US trade pressure and softening domestic demand.

Trump also said the US was “locked and loaded” for a potential response to the strikes on the Saudi facilities, after a senior official in his administration said Iran was to blame.

That inflamed fears about Middle East tensions and worsening relations between Iran and the US, powering safe-haven assets, with gold up 0.92% to $1,502.1 an ounce.

“The bigger issue is what premium markets will build in to reflect the risk of further attacks,” said Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management.

“In the very near-term, we may also see a pick-up in safe-havens,” he added.

“Central banks are likely to look through the inflationary impact of higher oil prices but the added geopolitical risk to an already fragile backdrop will not go without notice.”

The US Federal Reserve is due to hold its policy meeting on Wednesday, at which it is widely expected to ease interest rates and signal its future policy path.

Saudi bonds hit

Dollar-denominated bonds issued by Saudi Arabia’s government and state-oil firm Saudi Aramco tumbled to multi-week following the attacks.

Saudi Aramco’s longer-dated bonds bore the brunt of the falls with the 2049 issue dropping nearly 3c in the dollar to touch their lowest since early August, data from Tradeweb showed.

“Markets had become too sanguine over the last few months about the geopolitical risks facing countries allied with the US against Iran, with Saudi Arabia particularly vulnerable,” said Patrick Wacker at UOB Asset Management.

“While Saudi Arabia’s sovereign fundamentals are still firm, bond prices will need to factor in higher geopolitical risk going forward,” he added.

In currency markets, the Saudi news pushed the yen up 0.2% to 107.88 to the dollar, while boosting currencies of oil-exporting countries.

The Norwegian crown surged as much as 0.7%, then settled at 8.9517 crowns against the dollar, up 0.37% on the day, while the Canadian dollar rose 0.23% to C$1.3253. The Russian rouble was also higher.

The currencies of oil importers such as Turkey and India underperformed.

The US dollar was little changed against a basket of currencies.

Germany’s 10-year benchmark was down 1 basis point at -0.46%. Bund futures rose 0.12%, while futures for US 10-year Treasury notes rose 0.27%.

Reuters