Uncertainty over the future of global oil production in the wake of recent attacks on Saudi Arabian oil facilities warrants a premium on the oil price going forward, according to Andreas Steno Larsen, global FX and fixed income strategist at Nordea Markets.
Drone strikes at the heart of Saudi Arabian oil production on Saturday sent shock waves through oil markets, triggering the largest spike in crude prices in decades. While Saudi Arabia has done much to restore calm, reassuring that its oil output will return to normal by the end of this month, investors should still trade oil with a risk premium for now, Steno Larsen told Bloomberg Daybreak Europe in an interview on Tuesday.
Traders should not rule out that Saudi Arabia is considering retaliatory action over the attack, he said.
“We know that either Iran or Yemeni rebels are capable of striking critical infrastructure in Saudi Arabia, and we don’t yet know if we are to expect any retaliatory attacks on, for example, Iranian oil refineries,” he told Bloomberg.
The drone attacks on Saturday hit the world’s largest crude-processing plant and a nearby oil field, both operated by Aramco, the state oil giant which had been preparing for an initial public offering (IPO).
The strikes cut around 5% of global supply, sending Brent crude prices up by as much as 20% on Monday. Prices fell back down again on Tuesday after Saudi Arabia said its oil output will return to normal by the end of the month. US President Donald Trump said on Monday that it looked like Iran was behind the attacks but emphasized that he would like to avoid a war.
“Trump doesn’t sound as if he’s ready to (retaliate), but we probably shouldn’t rule out that Saudi Arabia is looking into this option. So obviously we need to trade it with a risk premium,” said Steno Larsen.
He said the US is likely best positioned to deal with the oil supply shock, given its oil inventories and domestic supplies, while the relative losers are Germany and China.
Steno Larsen noted that the oil supply shock will likely have a dollar-positive effect, alongside growing concerns in the market over dollar liquidity.
“In general, we’re starting to see more and more signs of stress in dollar markets due to the stress on liquidity, and the oil story is exaggerating this,” he said.
Tune in for the latest developments when Steno Larsen appears on Real Vision on Thursday.
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