(18 September 2019) DAILY MARKET BRIEF 2：Saudi oil facilities attacked

Abqaiq sits at the heart of the Saudi energy system, with most of the oil produced in the kingdom processed there. Saudi Arabia holds nearly 70% of the global spare capacity.

The attack on Saudi Arabian oil production facilities, for which Yemeni rebels claimed responsibility, affects about 50% of Saudi capacity, and should therefore lead to at least a temporary surge in oil prices as market participants incorporate a higher risk premium into energy markets. However, US President Donald Trump has said that, if necessary, the US could also release its national emergency oil reserves to mitigate the Saudi oil supply losses. According to a first estimate by energy intelligence, 2.3mbpd could be brought back within one day. Also, strategic oil inventories in OECD countries should be adequate to meet short-term demand needs until these facilities are repaired - as long as the process does not extend beyond two months.

While at Monday's opening oil prices were initially up by as much as 19%, they afterwards settled up by around 11-13%. In addition, the Australian stock market, one of the first markets to open after the attacks, was down just 0.1%, indicating a limited sense of panic; and global stock market futures are also indicating very limited losses.

While the attacks present yet another headwind for a global economy that is already buffeted by deteriorating manufacturing activity and elevated trade tensions, we don’t believe that this short-term disruption to oil production will trigger a global recession. Thus, we maintain our current tactical asset allocation positions, which include a modest underweight to equities and a preference for carry strategies. On the back of geopolitical and market uncertainties, thematic gold exposure is still advised alongside countercyclical positions, such as Japanese yen longs.

By UBS