Finally, Britain’s blue-chip FTSE 100 index has ended the day where it started, down just 1 point at 7,320.
Relief at the falling oil price lifted some stocks, but this was countered by a rising pound (which pulls down multinationals’ overseas earnings).
Investors were also cautious ahead of Wednesday’s US interest rate decision.
How high could the oil price go, if full-blown conflict breaks out?
Simona Gambarini of Capital Economics think they could more than double from today’s levels. In a worst-case scenario.
She told clients:
We continue to think that US-China trade tensions and the outlook for Fed policy remain more important drivers of oil prices.
Nonetheless, we would not rule out entirely the possibility of an escalation in tensions, leading to an outright conflict in the Middle East. In that case, we would not be surprised to see oil prices reach, and perhaps even rise above, $150 per barrel by end-2019.
Intriguingly, the top Saudi source who spoke to Reuters also said Saudi Aramco had recovered “very fast” from the crisis, which highlights the “real value” of the company.
That could, perhaps, show that Riyadh is keen to shore up confidence in Aramco, and not allow its upcoming stock market flotation to be ruined by the attacks.
“The Hard Break on oil was caused by an official known as a ‘top Saudi Source’ that said that Saudi Arabia is close to restoring 70% of the 5.7 million barrels lost due to attack.” @EnergyPhilFlynn
— Emel Akan (@mlakan) September 17, 2019
“...Saudi Arabian oil output will back on line in 2 to 3 weeks. The Official did not address how this might not happen again. The Source also seemed to be touting the Saudi Aramco IPO by saying the recovery shows the real value of the company” @EnergyPhilFlynn
— Emel Akan (@mlakan) September 17, 2019
Despite this sudden reversal, oil is still up around 7% compared with Friday night, before a swarm of drones attacked the Abqaiq oil facility.
That suggests oil is now seen as a riskier asset, with a greater risk of military conflict in the Gulf region.
And no wonder, with US senator Lindsey Graham yesterday suggesting an attack on Iran’s oil refineries to “break the regime’s back”:
Sen. Lindsey Graham on possible response to attack on Saudi oil facilities: "The target list I would put … would be the Iranian oil refineries. Nobody is talking about invading Iran, but we want to make them pay a price for trying to disrupt world order” pic.twitter.com/uVmff7fWFG
— CNN Politics (@CNNPolitics) September 17, 2019
Oil drops 6% on report Saudi oil output will return to normal faster than initially anticipated#Oil #CrudeOil #Crude #barrels #brent #nymex #USOil #SaudiArabia #SaudiAramco #saudiattack pic.twitter.com/CWbw4qO1rq
— CNBC-TV18 (@CNBCTV18Live) September 17, 2019
Here’s the Reuters news story that send oil prices tumbling a few minutes ago:
Saudi Arabia’s oil output will be fully back online quicker than initially thought following weekend attacks on production facilities, two sources briefed on the latest developments told Reuters on Tuesday.
The Kingdom is close to restoring 70% of the 5.7 million barrels per day (bpd) production lost following the attacks, one of the sources, a top Saudi source briefed on the latest developments, said.
That source said output will be fully back online in the next 2-3 weeks.
EXCLUSIVE-#Saudi oil output to return faster than first thought-sources https://t.co/YXTKADjaZh @dmitryZ_reuters
— Mike Dolan (@reutersMikeD) September 17, 2019
Here’s a chart showing how the price of a barrel of Brent crude has suddenly tumbled, having posted its biggest ever percentage gain on Monday.
Here’s some instant reaction to the news that the disruption to Saudi oil production could be less than feared.
Saudi oil output to return much quicker than expected - oil prices tank
— IGSquawk (@IGSquawk) September 17, 2019
Energy update:
Oil - US Crude 5995 -4.32%
Oil - Brent Crude 6526 -4.42%#Oil #OOTT #Brent #WTI
Oil drops 5% on report Saudi oil output will return to normal faster than initially anticipated: @CNBC pic.twitter.com/qFH0hKxIJM
— Steve Burns (@SJosephBurns) September 17, 2019
Oil price plunges as Saudi output to return 'faster than thought'
NEWSFLASH: The oil price is suddenly plunging.
Brent crude has slumped by more than four dollars per barrel, dropping back to just $64.77 -- having hit $69/barrel earlier this morning.
That’s a huge move -- down around 6% today (almost half of Monday’s incredible surge).
US crude is also plunging, down almost $3 per barrel to $60.16.
The sudden selloff been triggered by a Reuters report that Saudi Arabia will repair the damage from Saturday’s attack on its major production facilities sooner than expected.
Source have told Reuters that
- Output will return to normal levels sooner than thought
- Output will be “fully back online” in the next two to three weeks
- Saudi is close to restoring 70% of the 5.7m barrels per day lost
- Impact on oil exports has been minimal, thanks to Saudi’s Aramco’s oil storage
More to follow!
Crude & brent oil plunge after Reuters, citing a source, reports that Saudi oil output will be fully back online in the next 2-3 weekshttps://t.co/qT4SPEEuYR pic.twitter.com/mLzbLYHf3v
— CNBC Now (@CNBCnow) September 17, 2019
Updated
The New York stock exchange has dipped into the red at the start of trading, adding to yesterday’s declines.
The Dow Jones industrial average is down 89 points or 0.33%, as worries about the Middle East mount.
U.S. stocks open lower https://t.co/sPi2Ofe7U5 pic.twitter.com/BI2iASKaIY
— Bloomberg Markets (@markets) September 17, 2019
Here’s a video clip of Iran’s supreme leader, Ayatollah Ali Khamenei, speaking today:
It’s important to remember just how big Saudi Aramco is.
As this chart from the Economist shows, Aramco produces nearly as much oil as Shell, Exxon, Total and Chevron put together.
And given the relatively low cost of extracting crude in Saudi Arabia, it makes more profits than that quartet -- plus BP as well.
How important is Saudi Aramco to global oil business? … well … add up all the Western oil majors and that gives you an idea. https://t.co/h1WXVg0h6X pic.twitter.com/XFhnjRreY5
— Adam Tooze (@adam_tooze) September 17, 2019
So by hitting than half of Aramco’s production capacity, last weekend’s attacks have had a serious impact.
King Salman bin Abdulaziz chairs the Cabinet's session, He expresses thanks and appreciation to the leaders of countries, officials of states, regional and international organizations and all those who expressed condemnation of the sabotage attack on two Aramco plants#Saudi pic.twitter.com/DMynKPdnHD
— channel 24 saudi (@english_24saudi) September 17, 2019
Statement from King Salman
Saudi Arabia’s King Salman has insisted that Riyadh can deal with the consequences of the attacks on its oil production installations.
King Salman chaired a meeting of Saudi ministers today, where the cabinet reviewed the damage.
In a statement, the cabinet said the Saudi Kingdom vowed to “defend its land and vital installations”, and that Saturday’s attack was intended to disrupt global oil supplies.
The cabinet also called on world governments to confront the attacks on Aramco’s production facilities “regardless of their origin” (thanks to Reuters for the quotes).
#BREAKING: King Salman of #Saudi Arabia: Saudi Arabia will defend its territory and facilities no matter where these attacks come from
— Amichai Stein (@AmichaiStein1) September 17, 2019
Updated
Iran's supreme leader speaks
Earlier today Iran’s supreme leader ruled out negotiations with the US “at any level”, claiming that Donald Trump’s Middle East strategy was “worthless”.
Ayatollah Ali Khamenei was speaking a day after Washington blamed Tehran for attacks on Saudi oil installations.
The AFP newswire has more details:
Ayatollah Ali Khamenei said the US adopted a policy of “maximum pressure” on Iran because it believes it cannot bring the Islamic republic to its knees through other means.
The leader was speaking after devastating drone attacks at the weekend that halved oil output of Iran’s regional arch-rival Saudi Arabia - the world’s top crude exporter.
“The policy of ‘maximum pressure’ against the Iranian nation is worthless and all Islamic Republic of Iran officials unanimously believe there will be no negotiations with the US at any level,” he said in a televised address.
Tensions between Iran and the US and its allies have threatened to boil over since May last year when President Donald Trump abandoned a 2015 nuclear deal and began reimposing sanctions in its campaign of “maximum pressure”.
Updated
The rising tensions in the Middle East, with Iran seizing several oil tankers and Houthi rebels attacking Saudi targets, had already hurt the markets.
Shares have been dropping in Riyadh in recent weeks, and have now lost all this year’s gains:
Saudi Arabian stocks sank after drone strikes highlighted the vulnerability of the kingdom’s oil facilities to terrorist attacks https://t.co/cyakaH4H54 pic.twitter.com/jXEkezKedf
— Holger Zschaepitz (@Schuldensuehner) September 15, 2019
Back in the UK, plans for a huge mine on the North Yorkshire Moors have been plunged into doubt, putting over 1,000 jobs at risk.
It’s also a blow to thousands of small investors, many living in the area, who had backed Sirius Minerals’ plan to mine fertiliser.
Sirius cancelled a $500m bond sale, to fund the project, this morning. It said it was struggling to sell the bond, and will now hold a “comprehensive strategic review” over its future. It also said the UK government had declined to provide financial support.
The news sent Sirius’s shares plunging over 50%.
Plan for huge Yorkshire mine in doubt as firm pulls £400m bond sale citing poor market conditions and lack of government support https://t.co/J66Wk6Gavn
— Julia Kollewe (@JuliaKollewe) September 17, 2019
Many Middle Eastern stock market have lost ground today -- not terribly surprising, with Donald Trump’s threat of military retaliation hanging over the region.
Saudi Arabia’s Tadawul index is down 1%, led by natural resources companies and energy producers. Bank shares also dropped.
Across the region, Egypt’s EGX 30 shed 0.8%, while the UAE’s DFM index has lost 1%.
Updated
David Madden, market analyst at CMC Markets UK, sums up the morning:
This morning equity markets are mixed as traders remain cautious about the political situation in the Middle East. Tensions in the region have been heightened in the wake of the attack in Saudi Arabia over the weekend.
Oil is a touch lower after the mammoth move yesterday, but it is massively up on the week, and that highlights the fear about disruption to production.
The macroeconomic outlook is a little soft, as the Chinese economy is slowing down, the German manufacturing sector is in contraction, plus the uncertainty in relation to Brexit, so higher oil prices are likely to make matters worse for the global economy.
Could Saudi Aramco follow WeWork’s lead, and delay its IPO?
Saturday’s attacks have thrown Aramco’s stock market float plans into fresh uncertainty. Investors must be more concerned that its oil facilities are vulnerable to attack, and concerned that geopolitical risks are rising.
Piers Hillier, chief investment officer at Royal London Asset Management, says investors will probably demand a higher “risk premium” when Aramco eventually comes to market.
“Oil futures curves for 3-10 years out have moved up about $1.25 from around the $50 mark. So while the spot market has jumped, reflecting near-term impacts on immediate oil availability and supply chain issues, the longer-term price has taken this in its stride, up 2-3%, with a modest bump up in prices, leading to an uptick in oil stocks or around 3-4%.
It would seem logical that Aramco’s IPO will be delayed while the damage is assessed but beyond this we would expect that the risk premium that investors will require should the IPO go ahead will now be higher.”
Aramco customers 'told to expect delays'
Saudi Aramco has reportedly warned some clients that there will be delays to their oil deliveries, following last weekend’s attack.
According to Bloomberg, at least four clients have been warned to expect delays of either days, or weeks. But, they’ve also been reassured that they’ll get their order eventually
Saudi Aramco informed PetroChina on Tuesday that its loadings of light crude oil for October will be delayed by about 10 days, said a senior Chinese state oil source with knowledge of the matter.
However, Aramco, the state oil company of Saudi Arabia, will still supply the same grades and volumes of light crude oil requested for October nominations, the source said.
The Chinese state refiner was also told that its September-loading light crude cargoes will be swapped to heavier grades with no change in volumes or delays, the source said.
“The (loading dates and volumes of) September cargoes are too prompt to be changed, as Aramco may be still assessing the damages to its facilities,” said the source.
Just in: German investors are even gloomier about their current economic situation, but slightly more optimistic about the future.
That’s according to the Munich-based ZEW Institute.
Its monthly survey showed that investors are still concerned about Brexit, and the US-China trade war. But, they’re also hopeful that the European Central Bank’s new stimulus package, announced last week, will boost growth.
ZEW reports that:
- Current conditions index: fell to -19.9, down from 13.5 in August. Worse than expected.
- Economic sentiment index: up to -22.5, from -44.1 in August. Better than expected.
Bittersweet news for #Germany 's economy: #ZEW Current Conditions falls further to -19.9 in Sep from prev-13.5 and more than exp -15.0 (lowest since June 2010)
— BP PRIME UK (@bpprimeuk) September 17, 2019
ZEW Economic Sentiment rises to -22.5 from prev -44.1 and more than exp -38.8@graemewearden pic.twitter.com/WCqUExOFKc
US energy secretary Rick Perry is trying to calm the markets again.
Perry, who’s attending an energy conference in Vienna, told reporters that the US is confident that markets are “well-supplied”.
He said:
“With regard to energy markets, the president has directed me to release oil from the Strategic Petroleum Reserve if that is needed to offset any potential disruptions.
But looking at the supply numbers we are confident that the markets remain well-supplied.”
Traders may not entirely share Perry’s confidence. As this tweet shows, the Brent crude oil price surged by a record amount yesterday, after the Saudi attack knocked out 5% of global output.
BRENT front-month futures prices surged +14.6% on Sep 16 following the attack on Abqaiq, an increase of 6.65 standard deviations, and the largest percentage one-day price rise on record (corrected): pic.twitter.com/dDR2UgA6aU
— John Kemp (@JKempEnergy) September 17, 2019
The markets are concerned that:
- a) supplies won’t be restored quickly,
- b) the shortfall won’t be fully covered by other countries
- c) Military retaliation against Iran (who deny involvement) could disrupt supplies further
Updated
China condemns Saudi attack, but urges calm
China’s government has condemned the attack on the Saudi Aramco oil facilities, but also called for calm.
Chinese foreign ministry spokeswoman Hua Chunying told reporters in Beijing:
“China condemns this attack on Saudi Arabia’s oil facilities and opposes any attacks on civilians or civilian facilities,”
She added that relevant parties must “to avoid taking actions that bring about an escalation in regional tensions”.
Asia-Pacific stock markets have closed for the day, with losses in China (-1.68%) and Hong Kong (-1.1%), but small gains in Australia (+0.3%).
APAC Closing Prices:#ASX 6695.3 +0.33%#NIKKEI 22001.32 +0.06%#HSI 26790.24 -1.23%#HSHARES 10502.37 -1.18%#CSI300 3891.22 -1.68%
— IGSquawk (@IGSquawk) September 17, 2019
Oil rises on supply fears
The Brent crude oil price is rising again, back over $69 and heading towards fresh four-month highs.
As you can see here, it spiked dramatically yesterday after the Saudi oil attack, surging by 14% -- a move usually only seen in times of war and economic crisis.
Donald Trump’s pledge to release oil from America’s reserves helped to stabilise the oil price.... but investors remain concerned that Saudi Arabia’s oil facilities may not be fixed for weeks...
Neil Mellor of BNY Mellon says:
Brent crude prices spiked on Sunday’s news, with the front-end contract rising $12 from around the $60 mark in New York on Friday. That prices steadied thereafter was undoubtedly in part due to President Trump’s immediate assurances that oil would be released from the strategic reserve. But prices have since risen to fresh highs amid the realization that supply-related risks are seemingly on the rise.
Most immediately, it is unclear when the oil facilities – which produce more than 5% of global supply – will be up and running once more. Certainly, Aramco stated on Sunday that it was looking to have restored around one-third of lost output by yesterday evening. However, a source close to the matter told Reuters that the return to full oil capacity could take “weeks, not days”.
Shares in cruise operator Carnival have dropped by 3% in early trading, to the bottom of the FTSE 100 losers column.
Higher oil prices will eat into its profits, and could also hurt economic growth - possibly meaning fewer people can pay for that trip of a lifetime....
Shares in oil giant have risen again this morning, as investors anticipate higher crude prices.
BP and Royal Dutch Shell topped the FTSE 100 risers at the open, up around 1%.
The four reasons WeWork's IPO hit problems
WeWork’s business model is pretty simple -- it buys offices, and then rents it out to businesses, or individual workers who might want an occasional hot-desk.
The idea is that WeWork handles everything -- from paying the utility bills to restocking the printer -- along with some enticing downtime options including video games and table football. For a while there was even unlimited free beer.
But ultimately, it’s office rental -- so a $47bn valuation always looked toppy.
Last week, my colleague Nils Pratley outlined the four reasons investors weren’t keen on backing the IPO.
- The pricing looked too rich, with losses of $1.9bn last year and more to come.
- Rivals are valued more modestly -- eg: London-listed property group IWG, is only worth £3.6bn despite actually making a profit
- WeWork’s business model - taking on long leases on big buildings and offering tenants short, flexible rents - is vulnerable to the economic cycle. Customers could trade down to a cheaper office -- or even flexiwork from a cafe - but WeWorkd can’t cut its costs.
- Fourth, and perhaps most seriously, there’s WeWork’s “breezy style of corporate governance”.
As Nils put it:
Co-founder Adam Neumann wasn’t obviously living up to the spirit of collective endeavour when his investment vehicle was paid $5.9m by the company for the right to use the trademarked word “we”. The sum has been repaid but how was the arrangement ever approved?
WeWork: Hope to list later this year
The We Company, the parent of WeWork, insists that its float will still take place by the end of the year (just not next week).
In a statement following the postponement of its IPO, it says:
“The We Company is looking forward to our upcoming [initial public offering], which we expect to be completed by the end of the year. We want to thank all of our employees, members and partners for their ongoing commitment.”
But... the delay is going to cause problems.
WeWork needs to raise at least $3bn through a float to unlock a new $6bn debt facility from its banks. As WeWork is currently loss-making, it would have to raise cash elsewhere if it lost that credit line. No wonder it hopes to press on.
Ironically the delay could be good news for Japanese tech investor SoftBank, a major investor in We. Last year it injected $3bn, in a move valuing We at around $45bn. Had We only floated at, $20bn, SoftBank’s investment wouldn’t look very rosy.
Introduction: Oil spike hits markets; WeWork becomes WeWait
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Global stock markets are extremely edgy today as investors worry about rising tensions in the Middle East.
Last weekend’s attack on Saudi Arabia’s massive oil facility at Abqaiq, and America’s threat of military response, has knocked shares around the world and driven oil prices alarmingly higher.
Fears of supply shortages drove crude prices alarmingly higher on Monday, up over 14%. Brent crude spiked to $69 per barrel, the biggest one-day jump since the 1980s. US crude finished at $62, the biggest one-day move since the financial crisis.
The jump in oil prices has hit airline stocks. Higher crude prices could mean slower global growth -- hurting banks, industrial firms and consumer goods makers.
Last night, the US Dow Jones lost 142 points, or 0.5%. Stocks have fallen in Asia overnight, with China’s CSI 300 index losing 1.7% and Hong Kong’s Hang Seng dropping by 1,5%.
Donald Trump has insisted that he doesn’t want war in the Middle East, but Washington are also insisting the attacks has Tehran’s fingerprints on it.
Remember when Iran shot down a drone, saying knowingly that it was in their “airspace” when, in fact, it was nowhere close. They stuck strongly to that story knowing that it was a very big lie. Now they say that they had nothing to do with the attack on Saudi Arabia. We’ll see?
— Donald J. Trump (@realDonaldTrump) September 16, 2019
Stephen Innes, Asia Pacific market strategist at AxiTrader, says investors worry that an oil price shock could push the global economy down:
Global equity markets are stabilising after the drone attack but remain in a state of limbo trying to access the economic damage of a possible lengthy oil price shocker, keeping in mind that every recession since 1973 has included an oil price shock, versus the favourable medium-term S&P 500 correlation to higher oil prices.
All the while, nervously evaluating the possibility of a joint military response from the U.S. and Saudi Arabia.
The other big news of the morning is that WeWork, the office space sharing firm, has postponed its controversial stock market flotation.
WeWork was forced to pull its IPO after getting a lukewarm, bordering on chilly, reception from potential investors.
The office sharing firm was once valued by major investor SoftBank at $47bn (£37.8bn), but was forced to slash its ambitions as Wall Street baulked at its heavy losses, complicated corporate structure, and founder Adam Neumann’s grip on the company.
It had been planning an investor roadshow to market the shares this week, ahead of a trading debut next week - but this is now on pause.
This is obviously a blow to the company, which had been under pressure to complete the IPO to unlock new funding.
As the Financial Times puts it:
The delay to the IPO will also block WeWork from accessing a $6bn loan that had been provided by a consortium of banks, contingent on a successful IPO this year. If WeWork is unable to finalise its listing in 2019 it could be forced to draw up new financing plans.
While the company is still set to receive a $1.5bn capital injection from SoftBank in 2020 as part of an earlier agreed deal, the cash cost of its global expansion has depleted its reserves and proven a key issue for investors.
Traders will also have a eye on the UK Supreme Court. Eleven of Britain’s top judges will hear today whether Boris Johnson acted unlawfully when he advised the Queen to suspend parliament for five weeks.
The agenda
- 10am BST: ZEW survey of German investor confidence
- 2.15pm BST: US industrial production figures for August (forecast to rise by 0.2%, up from -0.2%).
Updated
