Price of oil jumps nearly 15 percent amid Middle East volatility

Oil prices ended nearly 15 percent higher on Monday, with Brent crude logging its biggest jump in more than 30 years amid record trading volumes.

The volatility comes after an attack on crude facilities in Saudi Arabia cut the kingdom’s production in half and intensified concerns of retaliation in the Gulf region and across the Middle East.

Brent crude futures settled at $69.02 a barrel, rising $8.80, or 14.6 percent – its largest one-day percentage gain since at least 1988.

In the United States, West Texas Intermediat futures ended at $62.90 a barrel, soaring $8.05, or 14.7 percent – the biggest one-day percentage gain since December 2008.

The number of trades also ramped up, with Brent futures surpassing 2 million lots, an all-time daily volume record, Intercontinental Exchange spokesperson Rebecca Mitchell said.

“The attack on Saudi oil infrastructure came as a shock and a surprise to a market that had not been trading [with] volatility and was more focused on the demand aspect oversupply,” said Tony Headrick, an energy market analyst at St. Paul, Minnesota commodity brokerage CHS Hedging LLC.

“I think the tables abruptly shifted in the [direction] of the supply outlook and that caught many [who] were short off guard,” Headrick said, in reference to investors who had gambled on oil prices going down.

Output down millions of barrels

The Chicago Board Options Exchange’s Crude Oil Volatility Index, a gauge of options premiums based on moves in a US oil exchange-traded fund (ETF), rose to 77.17, its highest level since December of last year.

Saudi Arabia is the world’s biggest oil exporter and, with its comparatively large spare capacity, has been the supplier of last resort for decades.

The attack on state-owned producer Saudi Aramco’s crude-processing facilities at Abqaiq and Khurais cut output by 5.7 million barrels per day and threw into question its ability to maintain oil exports.

The company has not given a specific timeline for the resumption of full output. Two sources briefed on Aramco’s operations said a full return to normal production “may take months”.

“The challenge that Saudi Arabia faces is that is should continue to supply its usual customers with oil. Otherwise they would either start digging into their own strategic petroleum reserves or they would look for alternatives to buy from other markets,” Jawad Anani, an economist and former Deputy Prime Minister of Jordan, told Al Jazeera. 

“So therefore, I think that the Saudis will have to go to their oil reserves,” he added.

“It depends on how long the repairs are going to take and how fast it can be done, whether the increase in oil will be gradual or do they have to wait until the end of the repairs process before they can go back to their normal production?” said Anani.

Prices surged about 20 percent after the open on Sunday evening, with Brent crude posting its biggest intraday gain since the 1990-1991 Gulf crisis, before pulling back – as various nations said they would tap emergency supplies to keep the world supplied with oil.

US President Donald Trump approved the release of oil from the US Strategic Petroleum Reserve, which helped limit gains in oil prices.

‘Locked and loaded’

Oil futures climbed higher during the session after the Saudi-led military coalition battling Yemen’s Houthi movement said the attack was carried out with Iranian weapons, raising the prospect of a wider conflict involving the United States and Iran.

Trump has said Washington is “locked and loaded” to respond to the strike, and the threat of retaliation and an escalation of tensions in the Gulf may keep prices elevated, regardless of any relief from global stockpiles.

US Ambassador to the United Nations Kelly Craft told the Security Council that emerging information on attacks against the Saudi oil facilities “indicates that responsibility lies with Iran” and that there is no evidence the attack came from Yemen.

Britain’s UN Ambassador Karen Pierce told the council: “We’re still assessing what happened and who’s responsible for the attacks. Once this has been established, we will discuss with our partners how to proceed in a responsible manner”.

Meanwhile, Russia and China urged against hasty conclusions over the attacks.

Saudi oil exports will continue as normal this week, with the kingdom tapping into stocks from its large storage facilities, an industry source briefed on the developments told the Reuters news agency.

But the attack raises concerns about how long the kingdom will be able to maintain oil shipments. Major importers of Saudi crude, such as India, China, Japan and South Korea, will be the most vulnerable to any supply disruption. South Korea has already said it would consider releasing oil from its strategic reserves.

Saudi Arabia is set to become a significant buyer of refined products after the attacks, which may have also cut Aramco’s own refining capacity, consultancy Energy Aspects said. Aramco Trading Co is making enquiries to buy diesel for prompt delivery, trade sources said.