The new hot topic

Today's news headlines:

‘Oil price spikes as fears mount over Saudi supply disruption’. After the weekend attack on Saudi Aramco oil facilities, the initial assessment suggested considerable production capacity could be restored within a few days. The revised evaluation is several weeks or months will be needed to restore much of the capacity. This has raised significant questions about inadequate security arrangements by the Saudis and the extent of the supply disruption. (Financial Times)
‘Johnson frustrates EU with dearth of Brexit detail’. The news is not hopeful; Boris is under siege from every conceivable direction due to prorogation, and he doesn’t seem to be playing nicely with his EU counterparts. After meeting with European Commission president Jean-Claude Juncker, the Prime Minister was expected to attend a press conference with his host Xavier Bettel, the Prime Minister of Luxembourg. Johnson skipped the event, infuriating his counterpart and underlining the lack of progress his meetings have produced. (Financial Times)

A new unknown

The biggest uncertainty in the Saudi Arabia oil attack story is the amount of time it will take to fully restore output, which poses another downside risk to an already depressed global economy. When Asian trading opened late Sunday night, the knee-jerk reaction pushed Brent Crude nearly 20% higher to $72 per barrel before retreating $7 per barrel when it was thought output could be restored within days. Today, it’s thought only 70% of total Saudi output can be returned in the coming weeks, which raises supply concerns and has pushed prices near the top end of its original spike.

Despite the supply shock, oil prices are still 22% lower than the 2018 high as of this morning, but the economic backdrop is also very different. Slowing global growth has depressed oil prices since October last year—partly through weaker demand—and a sustained spike in oil prices will certainly be felt by the private sector of developed economies. The longer the uncertainty around oil output, the more vulnerable prices are to volatility, and the bigger the impact will be on a deteriorating global supply chain.

Bottom line: One of the main reasons for recent monetary easing has been the impact on the supply-side of the global economy, and the attack on Saudi Arabia’s oil infrastructure adds to this downside risk. It will take more time for economic effects to channel into the world economy, but the event may be a supporting factor for looser monetary policy in the future.

GBP/USD

After falling to the 50-day moving average over two weeks of trading, the weekend’s attack has rallied the Dollar Index to the top of the two-week range. While Sterling hasn’t been sold off, it hasn’t made any further gains. Tomorrow’s Fed Press conference is the next key event, where the market anticipates the Fed to cut interest rates by a further 25bp. While the policy move is already priced in, the focus will be on language around global growth and the new hot topic, oil.

GBP/EUR

The Euro was the big loser yesterday, trading opposite the Dollar rally. Part of this was perhaps ascribed to this morning’s ZEW Economic Sentiment Survey which fell dramatically last month and indicates economic decline. Today’s release, while still deeply negative, was considerably better than last month and forecasts. The Bank of England’s Monetary Policy Committee meeting on Thursday is expected to be a dud because no one expects any policy changes until the Brexit issue is settled.

EUR/USD

The oil attack brought the pair to the bottom of the current trading range, and the restoration of a risk-off tone means the Dollar is likely to remain supported. Of course, the Fed Press conference has the potential to undermine this.