|16 September, 2019

First oil cut isn't the deepest for world economy

The more consumers and businesses have to pay for oil and oil products, the less they have to spend on other things

Image used for illustrative purpose. Oil pours out of a spout from Edwin Drake's original 1859 well that launched the modern petroleum industry at the Drake Well Museum and Park in Titusville, Pennsylvania U.S., October 5, 2017.

Image used for illustrative purpose. Oil pours out of a spout from Edwin Drake's original 1859 well that launched the modern petroleum industry at the Drake Well Museum and Park in Titusville, Pennsylvania U.S., October 5, 2017.

REUTERS/Brendan McDermid

LONDON  - The last thing the slowing world economy needs is a big and unexpected disruption in oil output. Weekend attacks which took out roughly half of Saudi Arabia’s crude output appear to fit that bill. But even fragile global growth can probably withstand this first cut.

Brent crude prices rose by as much as a fifth on Monday morning, the biggest intra-day percentage gain since the 1991 Gulf War. While prices were up less than 10% in later trading, that’s still a big jump. Sharp hikes in energy costs caused by supply shocks usually hurt global growth. The more consumers and businesses have to pay for oil and oil products, the less they have to spend on other things. The Organisation for Economic Co-operation and Development in 2011 estimated that a sustained $10 jump in the cost of a barrel of oil would knock 0.2 percentage points off its members’ growth in the second year after the shock.

It may take weeks rather than days to get Saudi production back to normal. However, the kingdom’s reserves can make up for a temporary shortfall. OECD countries, meanwhile, have inventories of oil and oil products that are equivalent to about 60 days of total demand and most of them are above the International Energy Agency’s reserve requirement for 90 days of net imports, according to UBS analysts. U.S. President Donald Trump has already authorised the release of oil from America’s strategic reserves if needed and said this would be enough to keep markets well-supplied. The United States can also ramp up production of shale oil within months in response to higher energy prices. The world is becoming progressively less dependent on Saudi oil.

Yet with both the United States and China grappling with a slowdown, there’s little room for complacency. The Iran-aligned Houthi movement said on Monday that Saudi Aramco's oil processing plants were still a target and could be attacked at "any moment". United States rhetoric towards Iran is increasingly bellicose. Sustained disruptions to Middle Eastern oil supply or anything that heightens the risk of them – will buoy crude. That will deliver the deepest cut to growth.

CONTEXT NEWS

- Oil prices surged on Sept. 16, with Brent crude posting its biggest intra-day percentage gain since the Gulf War in 1991, after an attack on Saudi Arabian oil facilities on Sept. 14 shut more than 5% of global supply.

- Brent crude futures, the international benchmark, rose by as much as 19.5% to $71.95 per barrel, the biggest intra-day jump since January 1991. They were trading at $65.35 per barrel, or 8.5% higher, by 0800 GMT on Sept. 16.

- U.S. President Donald Trump said on Sept. 15 he authorised the release of oil from the U.S. Strategic Petroleum Reserve if needed because of Saturday's attack on Saudi Arabia's oil facilities. Any release would be sufficient to keep the markets well-supplied, he said on Twitter.

- Trump also said the United States was "locked and loaded" for a potential response to the attack on Saudi Arabia's oil facilities, after a senior U.S. administration official said Iran was to blame.

(Editing by Peter Thal Larsen and Karen Kwok. Graphic by Vincent Flasseur.)

© Reuters News 2019

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