Saudi Aramco IPO in trouble due to increased risk. But US oil stocks soar
WASHINGTON – A few columns ago, I speculated that some kind of “black swan” event might be lurking out there, getting ready to torpedo September’s fitful stock market rally. And wouldn’t you know? A well-planned, meticulously targeted bombing attack knocked out a significant chunk of the Saudi Arabian oil infrastructure this weekend. That, in turn, clobbered the world’s oil supply. But it helped US oil stocks to soar. It also may have seriously messed up the Saudi plans to launch the long-awaited Saudi Aramco IPO.
Oil prices jump in reaction to the weekend attack on major Saudi Aramco facilities
As far as the incident’s effect on Monday markets, a Monday morning Reuters report obtained via my brokerage’s internal news ticker (and thus, no link) provides an admirably crisp rundown on Monday morning’s opening action.
“Shares of U.S. oil and gas companies surged on Monday, as a jump in oil prices in the wake of attacks on Saudi Arabia’s oil facilities drove a relief rally in one of the S&P 500’s worst performing sectors this year.
“Shares in major energy conglomerates including Exxon Mobil Corp and Chevron Corp jumped nearly 3%, while some of this year’s weakest performers saw huge gains: Chesapeake Energy Corp was up 17%, Denbury Resources up 26% and California Resources up 15%.
“Oil prices at one point surged nearly 20%, with Brent crude posting its biggest intraday gain since the Gulf War in 1991 after the attacks effectively shut down 5% of global crude output.
“That powered an almost 4% rise for the S&P energy index , but still left it as the second worst performing of the New York market’s 11 industry sub-categories, up around 9% this year, versus a 20% gain for the S&P 500 overall.
“‘Obviously we’re going to get a big boost today,’ said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas. ‘But its very unclear whether or not this is going to have any long-term effect…’
“‘The apparent sophistication of the attack in terms of both the target and its execution should re-establish or re-emphasize a geopolitical risk premium into the price of oil,’ they said.”
Beaten down US oil stocks catch a big break
Analysts note that they “expect the most significant upside reaction to the Saudi disruption [to be the shares of] ConocoPhillips (trading symbol: COP), especially in light of YTD underperformance versus Exxon (XOM) or Chevron (CVX).” They also expect real problems with the heretofore imminent IPO of Saudi Aramco. After all, why buy shares in a Saudi oil giant if its neighbors can blow up the company any time they want?
As for COP, XOM and CVS, all three US oil stocks were up sharply Monday morning. Alas, we had dumped our small position in underperforming XOM Friday afternoon. But balancing this, we held on to our equally underperforming position in ConocoPhilips. We lucked out here and were rewarded today with a big $5 per share pop. Assuming it holds through today’s 4 p.m. ET closing bell.
Back to the attack and its political and market implications.
One of my Sunday column, I detailed the spotty information on that sneak attack on the huge pair of Saudi Aramco oil facilities. But then, as now, conflicting details make it hard to parse the real story. That’s likely due to the difficulty of tracing the attack and its methodology. But it’s also due to sovereign governments – perhaps even our own – cranking up the spin machines in advance of a “final” assessment.
As of Monday afternoon, 2 p.m. ET, I’m still reading reports claiming that the bombing attack on a pair of Saudi facilities was carried out via a coordinated squadron of 10 precision bomb-laden drones. But other reports persist that X number of cruise missiles were the actual cause of the devastating destruction. Whatever the case, the attack seems to have worked perfectly.
The whodunit of this incident also remains up in the air. Some reports assert that it was launched by Yemen’s violent Houthi rebels, well-known to be funded, aided and trained by Iran, perhaps via their secretive Qods force. Other reports claim that only the Iranians could have carried out such a sophisticated attack. And if so, they could only have carried it out from the Iranian mainland. Or perhaps from a forward base set up in heavily Shiite Iraq. But the Iraqis deny this.
Iran was behind this attack. Whether it was a direct attack or carried out covertly by the Houthis is ultimately irrelevant.
The US will likely need to react to this attack, and forcefully. The Iranians already downed one of our own surveillance drones earlier this summer, after which the US held its fire.
But this incident, added to Iran’s recent attacks on foreign-flagged oil carriers, is a lot more serious.
Certainly, whoever underwrote the attack knew full well that a few well-placed bombs would torpedo, at least for now, the Aramco IPO, something the Saudis dearly want to accomplish.
Perhaps less obviously, a long-predictable jump upward in oil prices has happened. All at once. It’s obviously due to the indefinite disappearance of so much Saudi oil from the marketplace. Thus, Iran snags much better prices for the now-modest amount of oil it can sell due to the US boycott. Makes sense. For the Iranians.
On the other hand, major US oil stocks may continue to improve for quite some time. At least until Saudi supply issues recover.
Headline risk – and worse – is back again. Investors beware
All in all, the aggression, subterfuge, and outright lying has long characterized the Middle East. And it gloriously remains on display once again. And that’s why this neck of the woods remains perpetually perilous for companies and governments alike.
But what we’re really left with today is what Mr Market most abhors – uncertainty. That, in turn, offers little help to an already tariff-confused world economy.
As to the political and military outcome of this mess, we’ll just have to wait and see. But we do live in interesting times.
– Headline image: From VOA video viewing one area of attack the morning after the bombing. YouTube video screen grab. US government agency video in the public domain.