Attacks on Saudi Arabian oil facilities over the weekend have prompted moves of as much as 20% higher in the price of oil as the market factors in the disruption to supply.

It is reminder of how important Saudi Arabian production remains to global oil supply, despite the emergence of US shale production in recent years.

This has several implications for investors. Firstly it is potentially good news for two of the largest constituents of the FTSE 100, in Royal Dutch Shell (RDSB) and BP (BP.). Shares in these major oil and gas producers are up 3.7% and 2.8% respectively.

Secondly, the resulting impact on inflation, as higher fuel costs feed into the economy not least for motorists at the pump, is a potential headache for central banks which have been busily cutting interest rates in an attempt to stimulate economic growth.

Given increasing rates is one of the main tools available to combat inflation, this could present a significant conundrum.

ESCALATING RISKS

An increase in fuel costs will impact on businesses, including those listed on the stock market, not least International Consolidated Airlines (IAG) which is down 1.8%.

Finally an escalation in geo-political risks in the Middle East could have implications beyond the oil market and it was no surprise to see traditional safe haven gold move more than 1% higher.

AJ Bell investment director Russ Mould says: ‘Where oil goes next depends on the extent of the outage. Suggestions are that it could take at least a few weeks to get back up and running.

‘There is the risk that the attacks lead to a significant escalation of tensions in the Middle East.

‘The fact the US has pointed the finger at Iran and Donald Trump’s pledge that the country is ‘locked and loaded’ to respond does suggest that oil prices will factor in a greater level of geopolitical risk, at least in the short term.’

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Issue Date: 16 Sep 2019