City Index | Sep 16, 2019 15:19
So-called oil ‘supply shocks’ have typically led to sustained oil price inflation, doing serious damage to the global economy markets. Will this one?
So-called oil ‘supply shocks’ have typically done serious damage to the global economy. That’s partly because of the impact of higher prices, which inflate the cost of fuel and the myriad products derived from oil, particularly chemicals and plastics.
The other obvious channel for impact is sentiment – both in financial markets and economically. To begin with, some oil-share dominated indices can often seem as if they will benefit. For instance the UK’s FTSE 100 appeared to show some positive early reaction on Monday, given that two out of three of its heaviest-weighted shares – BP (LON:BP) and Shell (LON:RDSa) – rose sharply. They were reacting to weekend attacks on Saudi Arabia’s biggest crude oil processing facility that slashed as much as 50% of the country’s output. However, further into Monday’s session, none of Europe’s top stock indices were rising.
Source: Bloomberg/City Index
The main point that springs out right now is that whilst there’s no underestimating the seriousness of the weekend’s events, so far, the impact should be seen as relatively contained because the price increase is far lower than much larger medium-term price spikes in recent history.
Given that the medium-term oil price impact looks set to be measured and not extreme for now, it makes sense that the stock market reaction is not yet consistent with the notion that open military conflict involving Saudi Arabia and Iran, and possibly the United States, is likely. To be sure, trepidation is being expressed elsewhere.
Treasurys are leading sharp rallies across all developed-market sovereign debt. Other typical ‘safe-havens’ are also seeing demand as the yen, gold and to a certain extent the dollar, erase last week’s declines with gains. Even for ‘safe havens’ though, it’s a nuanced ‘risk-off’ picture. For one thing, the 10-Year U.S. Treasury yield is just emerging from one of its most rapid jumps for years. It climbed 33.6bp last week, its biggest increase since the week of the 2016 U.S. presidential election. That move coincided with a decisive rebound for global shares and pressure on other havens. As such, Monday’s safety seeking is almost certainly partly fuelled by some inevitable unwinding of last week’s moves.
It’s worth noting that the Swiss franc was not participating in haven advances at the time of writing.
Markets can be expected to continue responding to supply fears with trepidation, but little panic, in lieu of further information about how long it will take to return Abqaiq and Khurais to full capacity, and news on fresh developments in Saudi Arabia and Iran.
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Written By: City Index
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