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What the Saudi drone attack means for global markets

Ambush of Saudi Aramco likely to negatively impact its IPO plans – Naeem Aslam, ThinkMarkets.

NOMPU SIZIBA: The oil price shot up by $12 today [Monday], or as much as 20%, after investors realised that Saudi Arabian installations had been attacked by drones on Saturday, causing significant damage and temporarily cutting Saudi Aramco’s production by 50%. It also implied a 5% cut in global oil supply.

Towards the end of the South African trading day the oil price was up around 11%, trading around $67/barrel. So, what are the implications for global oil supply and the price in the short to medium term? And what does this do to Saudi Aramco’s designs on listing on the New York Stock Exchange?

I’m joined on the line by Naeem Aslam, the chief market analyst at ThinkMarkets. Thanks very much for joining us, Naeem, on the show. Just as things appear to settle in the world of geopolitics, something flares up elsewhere. In response to the drone attacks on Saudi Arabia’s oil facilities, US President Donald Trump says he has his suspicions and he’s “locked and loaded, depending on verification”.

There are so many offshoots to this story, but can we expect heightened tension from this episode, with some speculating that the oil price could hit $100/barrel?

NAEEM ASLAM: Thanks for having me. I think first of all we need to look at this particular story from three different angles. Number one, as you have mentioned, it heightens political tension. I completely concur that we are there, definitely, especially if Saudi Arabia confirms that it is Iran which has [carried out the attack], and that means that the geopolitical element in the Middle East is going to be heavily influenced.

Secondly, I think Saudi Arabi also needs to be mindful that this particular situation has just happened ahead of the IPO [initial public offering] for Aramco, which they are planning. And, most importantly for Saudi Arabia, the prince’s vision of 2030 because, imagine, if this heightened geopolitical situation leads to some sort of mini or an actual war, or any sort of military action in the Middle East, who is going to really invest in the Middle East? The Saudi Arabians vision of 2030 is really going to go down the drain.

And, speaking from the oil supply, that remains a very different question. And, looking at the price action, I think investors were a lot more nervous and anxious as it started this morning. But now, looking at it, the prices are already well below the opening price. So, I think, despite the fact that we have a 5.7 median, which is oil supply completely sucked out of the equation for the temporary point. But traders are hopeful Saudi Arabia is going to miss all that.

NOMPU SIZIBA: Now the issue is how long will it take Saudi Arabia – which has effectively lost 50% of its output – to restore full output, and what does that do to the markets it generally serves? It’s a big player in serving the East, for example.

NAEEM ASLAM: I’m very interested in the latter part of this question – who is going to be the biggest beneficiary of this one? And then we said we know that Russia has an ability to prop up its production substantially, because whenever we are talking about Opec plus 80, all this about Russia, whether it’s going to comply or not.

So, I think one of the biggest beneficiaries of this one is going to be the United States and of course Russia, which is both these countries have the ability to prop us production substantially; they are filling the gaps. So, in the long term are they going to take the lion’s share, and are they going to share the world, and Saudi Arabia pumping up their oil production doesn’t really mean because of these, we also have the capability to really fill in those big blanks.

I think that’s what investors are really going to be looking at. But again, there are several theories out there why this particular thing has happened; what are the motives behind it, especially with Donald Trump – the recent incident of John Bolton stepping down, and the lesser exchange that …… part of the possibility of some sort of a deal with Iran, which will really kind of provide a lot of tailwind in terms of a riskier appetite from investors’ perspective emerging in the Middle East.

But now over the weekend this entire situation has changed, and now the speculations or the various different theories out there is maybe that was one of the tactics of John Bolton stepping down, and then this entire situation happened, because we know Saudi Arabia is always going to blame Iran, especially given the history of it. The fact is these two major powers in the Middle East need to think internationally, intelligently, and they should be thinking more of working together, putting their differences aside. That would bring them a lot more prosperous future, rather than fighting this altered demon fight among themselves, then just impacting the entire Middle East.

NOMPU SIZIBA: Yes, Naeem, that is the theory about how people should be conducting themselves. Now, assuming the crude oil prices remain elevated in the short to medium term, this will probably be quite bad news for the aviation sector, no doubt because that will see a rapid increase in the jet fuel price. Your thoughts on that?

NAEEM ASLAM: I think the element that you are really touching on here is a bigger part of inflation that you are really talking about. This is going to be important, especially in that we have a Fed meeting in a few days. One of the targets for the Fed is about touching that inflation level. And then Donald Trump has already talked about whether the Fed should increase that inflation target in order for them to do more quantitative easing, so that they can do what the European and Japanese central banks are doing, or other central banks which have already adopted dovish monetary policies.

So, I think, yes, the price is obviously going to go up. But if the crude price is going to touch that $100/barrel level, I highly doubt that, because I think renewable energy and the shift of moving away from the fossil energy is still strong.

But yes, a heightened geopolitical condition, which can lead to some sort of war or something similar – a military action. That can certainly spike the oil prices very, very high. But again, I’m speaking from a price action. The price of oil, that’s what I’m looking at.

NOMPU SIZIBA: So, as a major lubricant for the global economy, do we need to worry about a price-sensitive world in terms of the oil price, especially because perhaps people are concerned that we are going to have a high oil price. This could catalyse a global recession, or is that simply being too sensationalist?

NAEEM ASLAM: Yes, I think if people just have one of those theories which are out there, I think oil has lost its persona of using that lever in the long term. So in the short term we may see some sort of news, some shock waves coming into it. But from a longer perspective I certainly do not concur with these speculative theories at all.

NOMPU SIZIBA: Given your analysis, how have you seen counters that are correlated to the oil price? Have they also corresponded and moved up, despite what you’ve analysed – that actually this a short-term issue?

NAEEM ASLAM: Well, let’s look at the overall market today, and then see that there were exactly the same. We see that the [VIX] have gone up massively today, with about an about 11% change in the rates. But, if you look at the performance of oil, overall performance year to date, this is up 26% and Brent is up nearly 21%. On the stock markets all the major benchmark indices are up, but today everything is down. So, overall it is a risk-off day.

The bond pressure that we are seeing is actually in the oil market, and the traditional safe havens, the likes of gold and everything else, yes, there is a momentum there, yes, platinum has also attracted a lot of attraction because traders are worried about not only oil. It’s a bigger picture. It is about what is going to happen out of a trade war. Are we going to see some sort of a light at the end of this tunnel? What is happening with the inverted bond yields, and these falling bond yields?

Right now the US Treasury yield has moved all the way from below 0.5 to 0.69 now. The moves did improve substantially in the last week. They did increase in the last week but if you look at the bond yields overall, from a year-to-date perspective, we are in some serious trouble. I think from that particular perspective right now I’m looking more for safe-haven trade. The incident like oil or anything else, again it backs my thesis that it is a time when we should be looking for our safety, looking for a hedging level overall risk, unless these particular risks may start to fade away.

NOMPU SIZIBA: Just to conclude, let’s come back to Saudi Aramco. You did touch on it. I felt at the beginning of our conversation you were touching on everything that I had planned to ask you, so let’s just delve a little bit deeper. As you mentioned, Saudi Aramco is looking to do an IPO, an initial public offering, possibly in New York – an international listing anyway. Obviously this latest incident is really going to mess up any prospectus that they might want to put out. How much time do you think they are going to lose in terms of being able to offer their offering on the market?

NAEEM ASLAM: I think is going to have a huge impact, because there are certain headlines already in the market that expect more delay in this IPO – and remember this IPO story is already nearly two years old. The recent attack – I think investors are going to be looking at what sort of surveillance or other military equipment the companies are going to deploy. A political situation like this is an opportunity for companies which are selling surveillance and military equipment, and, if you look at the stock performances of any of those stocks, you can see there’s a decent surge in them.

Now investors are going to look, I think, at what sort of other assets they have deployed after this incident, because obviously this is not the end. There will be several different attacks. Is their company really going to deploy its own assets on time, which will be ready to ward off any of these sort of future attacks?

So, of course, you’ve got to look at it from an investor’s perspective. Do they really want to be involved in a situation where they know that their entire asset can just be blown out, and then a huge production cut can occur in just a matter of seconds? It’s a very risky space to invest in. Plus the overall conditions were not that favourable anyway, because I think as long as the tensions don’t die out, which the Obama administration did try its best to put back on track, especially in respect of Iran, I think we are in very rough water for the time being.

NOMPU SIZIBA: Thank you Naeem, for your time today.

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