Oil prices hit four-month highs on Monday after attacks on crude facilities in Saudi Arabia fuelled worries over the impact of an oil shock on economic growth, halting a positive run in world stocks and bolstering demand for safe-haven assets.
Brent crude futures rose nearly 20% at one point in their biggest intra-day gain since the Gulf War in 1991, and U.S. futures jumped almost 16%, both hitting their highest level since May. But prices came off their peaks after U.S. President Donald Trump authorised the use of the country’s emergency stockpile to ensure stable supply.
By 1126 GMT, Brent futures were up 10% at $66.33 per barrel, while U.S. light crude was up 9.5% at $60.27.
The upheaval in the oil market and poor economic data from China pushed gold prices, the Japanese yen and Swiss franc higher and sent core euro zone bond yields lower, even though the broader fallout on markets was not dramatic.
„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,” said Mark Haefele, CIO at UBS Global Wealth Management.
„On the back of geopolitical and market uncertainties, thematic gold exposure is still advised alongside countercyclical positions such as Japanese yen longs,” he added.
World stocks halted a four day winning streak to trade slightly lower, down 0.15% on the day. European shares fell 0.4% and Wall Street signalled a weak start, too, with futures for the S&P 500 off 0.4%.
Monday’s rapid spike in crude prices came at a time when central banks in the United States, Europe and Asia are easing monetary policy to fight a slowdown in the global economy amid a drawn-out trade war between Washington and Beijing.
The U.S. Federal Reserve is due to hold its next policy meeting on Wednesday, at which it is widely expected to ease interest rates and signal its future policy path.
Expectations of monetary policy stimulus have been helping offset immediate concerns over the economy, supporting equity prices. World stocks are trading just around 2% below the all-time peak they hit in January 2018.
Data from China earlier on Monday underscored a slowdown in the world’s No. 2 economy, although that bolstered hopes of more stimulus policies from Beijing to underpin the economy.
Industrial production in China grew at its weakest pace in 17-1/2 years, the data showed, amid rising U.S. trade pressure and softening domestic demand.
Citi strategist Dirk Willer said the impact of a sustained rise in oil prices would be more pronounced for Europe and China than for the United States, which is now a net crude exporter, even though U.S. consumers would be hit.
„The U.S. may still be a relative winner. The size of the shock obviously will depend on how much oil is taken off the market,” he said.
The weekend attack at Saudi Aramco’s facilities shut down about 5% of the world’s supply and while the company had not given a timeline for the resumption of full output, sources said a return to normal volumes „may take months”.
Gold shines, SAUDI bonds hit
Trump also said on Sunday the United States was „locked and loaded” for a potential response to the attack on Saudi Arabia’s oil facilities, after a senior U.S. administration official said Iran was to blame.
That inflamed fears about Middle East tensions and worsening relations between Teheran and Washington, powering safe-haven assets, with gold up 1% to $1,504 per ounce.
Dollar-denominated bonds issued by Saudi Arabia’s government and state-oil firm Saudi Aramco tumbled to multi-week following the attacks.
„Markets had become too sanguine over the last few months about the geopolitical risks facing countries allied with the U.S. against Iran, with Saudi Arabia particularly vulnerable,” said Patrick Wacker at UOB Asset Management.
„While Saudi Arabia’s sovereign fundamentals are still firm, bond prices will need to factor in higher geopolitical risk going forward,” he added.
Appetite for safe haven assets pushed yen up 0.3% to $107.7, while currencies of oil-exporting countries such as the Norwegian crown, the Canadian dollar and the Russian rouble were also in demand.
The U.S. dollar was up 0.1% against a basket of currencies.
Elsewhere in bond markets, core longer-dated euro zone bond yields tumbled as the Saudi developments and the poor data from China helping boosted demand for safe-haven assets. Brexit uncertainty also weighed.
Germany’s 10-year benchmark was down at -0.479%. Bund futures rose 0.3%, while futures for U.S. 10-year Treasury notes rose 0.4%.
„While there are no doubt short-term inflationary implications from an oil price shock, we would imagine that US rates will fall, given rising growth fears,” Citi’s Willer said.