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Oil price surges as US warns Iran it's 'locked and loaded'

Smoke is seen following a fire at Aramco facility in the eastern city of Abqaiq, Saudi Arabia, September 14, 2019. REUTERS/Stringer
Smoke is seen following a fire at Aramco facility in the eastern city of Abqaiq, Saudi Arabia, on 14 September. Photo: Reuters

The price of oil surged on Monday, following an attack on Saudi Arabian facilities that has ratcheted up tensions between the US and Iran.

Drone strikes hit two Saudi Arabian oil facilities on Saturday, knocking out about half of the country’s oil output. The attack has knocked out an estimated 5% of global oil supply and US President Donald Trump on Sunday authorised a release of crude from its Strategic Petroleum Reserve (SPR).

The price of oil futures spiked by 20% at the open in London, the most on record, amid the fall in supply and escalating tensions in the key oil producing region.

READ MORE: Attack spark huge inferno at two Saudi Arabian oil refineries

By 7.45am UK time, prices had settled down slightly. Brent futures (BZ=F) were up by 10% to $66.34 a barrel and crude was up 9% to $59.80 (CL=F).

“This attack has material implications for the oil market,” said Alan Gelder, VP for refining, chemicals and oil markets at energy consultancy Wood Mackenzie.

“A loss of 5 million barrels per day of supplies from Saudi Arabia cannot be met for long by existing inventories and the limited spare capacity of the other OPEC+ group members. A geopolitical risk premium will return to the oil price.”

Analyst Jon Rigby and team at UBS said in a note on Monday morning: “The direct impact from the shutdown on physical oil markets will be determined by its duration, and the CEO of Saudi Aramco said on Saturday that an update will be provided in 48 hours.”

As well as supply fears, increasing tensions between the US and Iran are also contributing to rising prices amid fears of potential conflict between the two countries in the region.

The Saudi Arabia attack were reportedly carried out by Yemen’s Houthi rebels but the US has blamed Iran, claiming the Middle Eastern state supported the rebels.

Over the weekend, US secretary of state Mike Pompeo accused Iran of “an unprecedented attack on the world’s energy supply” and US president Donald Trump tweeted that the US was “locked and loaded” if Saudi Arabia requires.

Iran has denied it is behind Saturday’s attack and warned it was ready for war.

“The Middle East continues to sit on a powder keg and might soon face significant geopolitical challenges,” Marc-André Fongern, an FX and macro strategist, at MAF Global Forex, said.

“Indeed, I expect oil prices to rise in the longer term, as tensions between Iran and Saudi Arabia are unlikely to be short-lived”