Brent oil sees biggest intra-day jump in 28 years. Can the up move sustain?

Brent crude oil prices jumped 20 per cent in trade on Monday to around $71 a barrel – their biggest intra-day jump since 1991 – as attacks on a Saudi Aramco facility halted production of 5.7 million barrels of crude a day. This is more than half of Saudi Arabia's global daily exports and nearly 5 per cent of the world's daily crude oil production. 

According to estimates, this is the world’s biggest disruption in oil markets, surpassing the oil loss from Kuwait and Iraq back in 1990-91.

While in the short-term, the direct physical impact on the market might be limited, analysts say the development has the potential to move the market away from its bearish macroeconomic cycle and raise the risk premium as funds reduce their short positions.

“The sudden change in geopolitical risk warrants not only an elimination of the $5-10 per barrel discount on bearish sentiment, but adds a potential $5-10 per barrel premium to account for current Middle Eastern dangers to supply and the sudden elimination of spare capacity. Price could move higher if Saudi production is confirmed to be curtailed for a more substantial period which is not our current assumption,” says Chris Midgley, global head of analytics at S&P Global Platts.

While it is still unclear how extensive the damage is and how long it might take to get them back on stream, analysts say, inventory draw may cushion the blow. Aramco has 66 million barrels of storage capacity (or about ten days of the disruption) at its four crude export terminals, reports suggest, and may hold even more at other domestic and international hubs. On the other hand, a possible release of more oil from the strategic petroleum reserves (SPR) to cap the prices is also not ruled out.

“A release from strategic oil stockpiles would appear to be the most effective immediate response to avoid a global supply shock and a price rise. The strategic Organisation of Economic Cooperation and Development (OECD) stocks are maintained for tiding over exactly the kind of emergencies the world might be in now, and their release is the fastest of all possible responses to cope with a major supply disruption,” says Vandana Hari, founder, Vanda Insights.

Meanwhile, US President Donald Trump has announced the release of oil from the US Strategic Petroleum Reserve (SPR), which the market was perhaps expecting given the spike of 20 per cent eased. Brent crude oil prices cooled-off after the initial up move, but were still trading nearly 10 per cent higher at $66.28 a barrel.

“There will be a higher geopolitical risk premium built into the entire Middle East oil complex until matters are properly resolved. Oil importers like India will suffer,” wrote Michael Every, senior Asia-Pacific strategist at Rabobank International in a report.

Analysts at Jefferies, too, share the same view and suggest the rise in oil prices will be another macro headwind. “Replacing Saudi barrels that made up a fifth of imports in the last few years, would be a challenge. A $10 rise in Brent will lift the annualised import bill by $15 billion, or around 50 basis point bps of gross domestic product,” wrote Somshankar Sinha, managing director and head of equity research for India at Jefferies in a note.