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Oil Prices, Stocks Pump Higher After Drone Strike Cripples Saudi Oil Supply

Jayson Derrick

Saudi Arabia suffered a drone strike at its Abqaiq crude oil processing facility over the weekend, which happens to be the "most critical" piece of infrastructure in the country.

The price of Brent crude and WTI oil traded higher by around 10% Monday morning.

What Happened

The Abqaiq facility handles half of all Saudi Arabia's oil production and helps supply the global oil market. Around 5 million barrels per day will be impacted from the drone attack which represents around 5% of the total global supply.

Saudi Arabia's government continues to assess the damage and any timeline to a full return are not clear. The Wall Street Journal reported Saudi Arabia could restore one-third of the disrupted production within hours.

Aneeka Gupta, a commodities strategist at Wisdom Tree, told BBC it may take weeks for the facilities to fully return online. If the outage lasts more than six weeks, oil prices could trade above $75 per barrel.

See Also: 3 ETFs For What Could Be A Wild Day In The Oil Patch

Why It's Important

Rob Thummel, portfolio manager at Tortoise Capital, said the commodity could move higher in the near term by as much as 20%. Over the long term, the commodity could trade with an added $5 to $10 in risk premium until the likelihood of further attacks are reduced.

Gasoline prices U.S. consumers pay at the pump could rise by 25 cents. U.S.-listed energy stocks could benefit at a time when companies are trading at half of the EV/EBITDA multiple of the S&P 500 and offer a dividend yield that is 1.5 times higher than the S&P 500 index.

Some countries will likely be more impacted, including Asian countries which are major clients of Saudi Arabia oil. Specifically, more than half of all 8 million barrels of oil Saudi Arabia exports are destined to China, Japan, South Korea, and Taiwan.

What's Next

Existing global oil inventories can support 90 days worth of oil supply and inventories are likely to be used so the world won't run out of oil, Thummel said. OPEC countries could help fill the void left by Saudi Arabia, especially after UAE, Kuwait and Iraq recently reduced their output as part of a broader OPEC agreement.

The U.S. could also increase oil production if required.

"We are fortunate that the U.S. has increased oil production so much over the last few years as this will assist in minimizing the oil price spike," Thummel said.

Price Action

Here is a glimpse at how some oil stocks and ETFs were trading ahead of Monday's market open:

  • United States Oil Fund LP (NYSE: USO): up 9.6% at $12.54.
  • Energy Select Sector SPDR (NYSE: XLE): up 4.7% at $63.95.
  • Marathon Oil Corporation (NYSE: MRO): up 12.7% at $14.32
  • Exxon Mobil Corporation (NYSE: XOM): up 3.9% at $75.46.
  • Chevron Corporation (NYSE: CVX): up 3.3% at $125.51.
  • BP plc (NYSE: BP): up 5% at $39.76.
  • Royal Dutch Shell plc ADR (NYSE: RDS-A): up 2.7% at $58.41.
  • Total SA (NYSE: TOT): up 1.9% at $52.83.

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