Insights

The risk to the global economy from disrupted Saudi oil production is contained

  • Written By: Daniel Casali
  • Published: Tue, 17 Sep 2019 14:00 GMT

Crude oil prices surged over 20% following two suspected drone attacks on Saudi Arabian facilities that knocked out around 5% of global supply at the weekend.

Oil Rig Min72

Commenting on the events, Daniel Casali, Chief Investment Strategist at Smith & Williamson Investment Management, noted:

“At first glance, the attacks on Saudi Arabia look highly risky for the global economy. State energy producer Saudi Aramco lost about 5.7 million barrels a day of output on Saturday, making this the biggest disruption to oil supplies ever recorded. The key question for investors is what impact will it have on the global economy. There are three reason to believe the impact could be manageable.”

“First, while Riyadh announced on 16 September that the damage could take many weeks or perhaps months to repair, there are enough crude oil reserves around the world to offset lost Saudi production. Set against 5.7m barrels a day in lost oil output, the latest data show the Saudis have 188m barrels in stored oil, OECD commercial crude oil inventories are 2,900m barrels and the US strategic petroleum reserves is 645m barrels. Just from these sources, stored oil (and additional output) could sustain oil consumption at current run rates for many months.”

“Second, consumers in developed economies have reduced the share of income spent on energy, reducing the risk of an abrupt halt to demand. For example, US personal consumption of energy products and services stands at 3.6% of disposable income, down from a peak of 8.6% in the early 1980s. Moreover, the US national gasoline price is below the important psychological threshold of $3 a gallon, making it unlikely to have a detrimental impact on consumer confidence.”

“Third, the rise in crude oil prices probably won’t lead to a sharp rise in inflation, as it did during the 1970s and early 1980s. Even after the latest energy price spike, US 5-year forward inflation expectations (a market measure of inflation) is still below the Federal Reserve’s 2% inflation target. Given the relatively low inflation environment, the US central bank will likely maintain its bias to cut interest rates. Easy monetary policy will continue to underpin global growth.”

“In short, the risk from rising energy prices on the global economy (and markets) appear contained for now.”

Source: Thomson Reuters Datastream, Stratfor, Smith & Williamson Investment Management LLP (data correct as at 13th September)

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

Risk warning
Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.

Smith & Williamson Investment Management LLP is part of the Smith & Williamson group.
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