Weekend drone strikes on the heart of the Saudi oil industry forced the kingdom to shut down half its crude production, amounting to a loss of 5.7M barrels a day, or roughly 5% of the world's daily production of crude oil. Yemen's Iranian-aligned Houthi rebels claimed credit for the attack, saying they sent 10 drones to strike at important Aramco (ARMCO) facilities, including the world's largest oil processing plant and a major oil field. The disruption sent WTI futures as much as 15.5% higher overnight to $63.34, the biggest intraday percentage gain since June 22, 1998, while President Trump authorized a release of crude from the Strategic Petroleum Reserve, as necessary.
Go deeper: While an oil price increase could benefit Aramco's upcoming IPO, vulnerable supply chains could rattle investor confidence.
Sell-side weighs in "No matter whether it takes Saudi Arabia 5 days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend's drone attacks on the Kingdom's infrastructure - that infrastructure is highly vulnerable to attack," according to analysts at Citi. "The market needs to price in a new level of supply chain vulnerability, with the speed Saudi can come back important not just for this instance but for future disruptions as well," added JPMorgan. For the global oil market, the 5.7M bpd Saudi halt is the single worst sudden disruption ever, surpassing the loss following the Invasion of Kuwait and Iranian Revolution.
Futures retreat The Saudi oil interruption is weighing on equities just as they were getting back into rally mode, with Dow and S&P futures down 0.4% and Nasdaq futures off by 0.6%. It would be the first decline in nine days for the DJIA, which had climbed back to within 1% from a record on Friday. Weak industrial output data from China (see below) further hammered market sentiment, as well as geopolitical worries. Some U.S. officials blamed Iran for the strikes on Aramco's (ARMCO) facilities, with President Trump saying he was "locked and loaded" for a response "depending on verification."
China's slowdown deepens Industrial output growth weakened to 4.4% in August, the weakest in 17.5 years, amid spreading pain from the trade war with the U.S. and softening domestic demand. Retail sales and investment gauges worsened as well, reinforcing views that China is likely to cut some key interest rates this week. Ahead of the data, Premier Li Keqiang said it would be "very difficult" for the economy to grow at 6% or more and that it faced "downward pressure."
Go deeper: China investing analysis at the Global Investing Center.