An oil and gas drilling platform stands offshore in the Gulf of Mexico in Dauphin Island, Alabama. Picture: REUTERS/STEVE NESIUS
An oil and gas drilling platform stands offshore in the Gulf of Mexico in Dauphin Island, Alabama. Picture: REUTERS/STEVE NESIUS

Tokyo — Oil fell more than 1% on Tuesday as the market hung on tenterhooks over the threat of a military response to attacks on Saudi Arabian crude oil facilities that cut the kingdom’s output in half and sent prices soaring by the most in decades.

The attack on Saturday heightened uncertainty in a market that had become subdued in recent months due to slowing global growth as the US-China trade war rages. Saudi Arabia is the world’s top oil exporter and has been the supplier of last resort for decades.

Brent crude was down 73c, or 1.1%, at $68.29 a barrel by 4.05am GMT, and West Texas Intermediate was down 87c, or 1.4%, at $62.03 a barrel.

Prices surged nearly 20% in intraday trading on Monday in response to the attacks, the biggest jump in almost 30 years, before closing about 15% higher. Equities and other markets were also under pressure on Tuesday.

“The question is how long it takes for the supply to get back online,” said Esty Dwek, head of global market strategy at Natixis Investment Managers.

“However, the geopolitical risk premium, which has been basically ignored by markets in favour of growth worries in recent months, is likely to be priced in,” she said.

A gauge of oil-market volatility on Monday rose to the highest level since December 2018 and trading activity showed investors expect higher prices in coming months.

Japan said on Tuesday it would consider a co-ordinated release of oil reserves if necessary.

US President Donald Trump said on Monday it looked like Iran was behind attacks on the Saudi oil facilities but emphasised he did not want to go to war. Tehran has rejected the charges that it was behind the drone strikes.

Relations between the US and Iran have deteriorated since Trump pulled out of the Iran nuclear accord in 2018 and reimposed sanctions on its oil exports.

Washington also wants to put pressure on Tehran to end its support of regional proxy forces, including in Yemen where Saudi forces have been fighting Iran-backed Houthis for four years.

“With the US ‘locked and loaded’ awaiting signs from Saudi Arabia that Iran was involved, tensions in the Middle East could get worse before they get better. Under these circumstances, the price of oil could remain elevated for some time yet,” City Index analyst Fiona Cincotta said.

“However, let’s not also forget that the demand picture isn’t great right now, which will dampen the oil price quickly. Most recently China’s industrial production figures disappointed overnight,” Cincotta said.

The attack on state-owned producer Saudi Aramco’s crude-processing facilities at Abqaiq and Khurais cut its output by 5.7- million barrels a day and threw into question its ability to maintain oil exports. The company has not given a specific timeline for the resumption of full output.