Bloomberg tweeted early this morning: “BREAKING: Saudi Aramco executives are having an emergency meeting after 10 explosive drones attacked the heart of the kingdom's energy industry.” (https://twitter.com/business/status/1172876148419829760?s=11)
Bullets:
1. There is evidence of a second large-scale Iranian drone. The US shot down the first one. Saudis were hit by this one. How many were launched? Was air defense penetrated? Is retaliation coming?
2. The Houthi in Yemen are an Iranian proxy in the thousand years’ war between the Shia and the Sunni. The Middle East is getting hotter.
3. The US is being tested here. Iran sourced offensive weapons that originate in part with the US’s global rivals.
4. Clearly, sanctions on Iran are not enough. Half of Saudi production is reportedly shut down.
5. Imagine trying to do an Aramco IPO with this news. Pricing war risk? Writing disclosures? This is an underwriter’s nightmare. A deal will probably be delayed.
6. A historical analogy is found in the 1973–74 oil shock that followed the Yom Kippur War. I remember oil’s rising from $3 to $12, triggering 1970s inflation and rising interest rates. What happens in a 2018-2019–2020 Middle East/Persian Gulf shock? See Al Jazeera link below for timeline.
We’re overweight US oil and gas and US defense. We’re shorter-duration barbell in bonds. We expect a lot of resetting and higher volatility.
We offer readers the following links for more information:
“Drone strikes target world’s largest oil processing facility, Saudi oil field; attack claimed by Iranian-backed rebels”
(https://www.foxnews.com/world/drone-attack-saudi-oil-facility-iran-rebels)
“Saudi Arabia Shuts Down About Half Its Oil Output After Drone Strikes” (https://www.wsj.com/articles/drone-strikes-spark-fires-at-saudi-oil-facilities-11568443375)
“Timeline: Houthis' drone and missile attacks on Saudi targets”
(https://www.aljazeera.com/news/2019/09/timeline-houthis-drone-missile-attacks-saudi-targets-190914102845479.html)
“Saudi Oil Output Cut in Half After Drones Strike Aramco Site”
(https://finance.yahoo.com/news/saudi-aramco-contain-fires-facilities-053230653.html)
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