Burn Notice

Oil rises to its highest price in thirty years

Image source: IhorL - Shutterstock, James Thacher @jamesthacher - Giphy

What's going on?

The price of a barrel of oil rose by the most in a single day for almost 30 years on Monday, after an attack on Saudi Arabia’s oil infrastructure threatened to limit the world’s supply of black gold.

What does this mean?

An aerial attack over the weekend took down a Saudi Aramco crude oil processing site – the world’s largest – as well as one of the company’s oilfields. That left half of Saudi Arabian oil production – and some 5% of the global supply – on ice, and potential shortages led investors to initially push the price of a barrel of oil up by 20%. But nerves were settled somewhat later on Monday: oil’s price was “only” up 10% after Saudi Arabia said it would imminently overcome some of the disruptions – and after the US announced it’d release some of its own stockpiles to keep the dark nectar flowing.

Why should I care?

For markets: Round one of many?
Oil companies’ stocks rose on Monday: scarcer oil makes their reserves more valuable, and any escalation of Middle Eastern tensions could disrupt supplies further. But firms dependent on oil – like chemicals companies and airlines – may be bracing for a gut punch. These companies typically shrug off fluctuations in oil’s value, thanks to futures contracts that lock in the prices they’ll pay in advance. But such contracts often include “force majeure” clauses which abandon agreed-upon terms in extreme unforeseen circumstances – perhaps like this one (tweet this). If that happens and oil’s price remains elevated, oil buyers’ costs may overshoot expectations and catch profits in the crossfire.

The bigger picture: Inflation conflation. 
The Federal Reserve is expected to cut the key US interest rate at its next update on Wednesday – a move that should go some way to boosting the prices of goods and services. But inflation could also be exacerbated by oil’s price hike, which will likely soon be felt in all sorts of end-product prices, from roads to toys.

Originally posted as part of the Finimize daily email.

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