Key Points:
• Iran is ultimately responsible for the drone attack on Saudi oil infrastructure
• Expect escalation between Iran, Saudi Arabia, and Israel in the region
Background:
Yemen based, but Iran backed, Houthi rebels took responsibility for a drone attack in Saudi Arabia that damaged two plants critical to the Kingdom’s oil infrastructure. The result of the attack on Saturday could temporarily cut Saudi Arabia’s oil output in half. How can we expect regional players to respond and how will this impact the energy market?
What Has Happened: “Clearly this is not Houthi technology. This attack is an extension of the proxy war in Yemen but quite sophisticated unlike past Houthi attacks. Just like Iranian Quds Force and Hezbollah IED proliferation, this is a new tool we should expect to see flourish. Not surprising to see the attack focused on Saudi oil infrastructure as it targets the heart of the Kingdom’s economic power. It is very hard to defend against this type of attack. We can expect to see retaliation and escalation between the involved parties.” General Frank Kearney
“Tehran is responsible for this attack. We see Iranian influence and its aggressive policies continuing. I would expect retaliatory strikes by the Saudi Air Force, and the Israel Defense Force will take advantage of the regional chaos and strike into Syria. Despite a challenged history, at this moment, and especially against Tehran, Riyadh and Jerusalem are “partners”. For Iran’s response, watch the Strait of Hormuz. Iran will declare innocence with regard to the drone strikes and will claim its increased provocation is defensive.” General Spider Marks
Why it Matters:
Comments from Head of Macro Strategy – Peter Tchir
1) Clearly the price of oil will go up and we should see Brent Crude rise faster than WTI. This fits with our ongoing theme that securing “safe” energy sources should be paramount to many companies’ strategies and supports our ongoing National Defense efforts for full domestic energy self-sufficiency.
2) While traditionally an attack of this magnitude would create a ‘risk off’ moment, we don’t think that will be the case right now. As a net exporter, we have exhibited great resilience to disturbances in the Middle East. In fact, the argument could be made, and we’ve made it repeatedly, that higher energy prices, especially when the result of supply disruptions in the Middle East or elsewhere are very good for the U.S. economy and energy companies. It will also ensure D.C. remains focused on the issue of domestic supply and continues to support, rather than antagonize, that industry. So, energy equities and bonds may continue to see a bounce in prices that started in late august and accelerated last week. The energy field service providers could also be interesting as any retaliation and further attacks will likely just create more future business for them (harsh – but likely accurate).
3) On the treasury/rates side of the equation, the ‘traditional’ reaction would be for a flight to safety. We may see that as a knee-jerk reaction, but unless there are clear signs of significant escalation, rather than ‘just’ retaliation, we think the rally in treasuries will be short-lived. In fact, this only adds to the inflationary pressures we have seen creeping into the market with some recent data.
Original Post 9/15/2019