FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition covering the latest in the Saudi oil attacks and US Fed rate cuts. For the full newsletter, subscribe today.
Saudi oil disruption unlikely to impact medium-term oil prices
Key Takeaways
- An attack on Saudi oil facilities over the weekend led to a temporary outage of some 5.7 million b/d of crude oil production–around 5% of daily oil demand.
- Uncertainty surrounding the length of the outage led to an immediate jump in the price of Brent crude, which increased from around US$60.23 on Friday to as high as US$69.19 on Monday.
- Prices have quickly retreated, as Saudi officials have resolved major uncertainty in a series of announcements. The Saudi Energy Minister, Abdulaziz bin Salman, told reporters that Aramco had restored half of the total output loss before Wednesday, and that the rest of the lost output would be restored prior to Saturday. By late Wednesday, Brent oil prices had fallen back to US$62.26.
- This is only the most successful of a series of attempted attacks on Saudi Aramco facilities and oil shipping routes that have emanated from Yemen. While Houthi rebels from Yemen have claimed the attacks, Saudi Arabia and the US have both blamed Iran.
Our View
The high level of oil inventories, low global demand growth, and a large amount of global supply growth all capped the recent surge in oil prices. Brent crude oil prices will remain volatile but we continue to expect Brent crude to average US$62 in 2019, trading mainly in the US$55–70 range, with weaker prices expected in Q4 as seasonal demand slows. However, prices could jump over US$70 if any substantial portion of Saudi output remains offline for more than six months–either because the damages at the Saudi Aramco facility are more significant than expected, or if another attack on a facility leads to a new outage. There is also the risk of an escalation of the US-Iran conflict over these attacks, but recent statements from President Donald Trump indicate that the US will continue to rely on economic sanctions rather than an escalation.
Business Implications
As the impact of these attacks appears to be limited and prices are already falling back to previous levels, there are no immediate business implications: Most plans should be largely unchanged. However, firms with operations in MENA should continue to design contingency plans to limit the impact should further attacks lead to a sustained increase in oil prices due to outages at key Aramco facilities. In the case that an escalation in the US-Iran conflict leads to regional disruptions, growth and profitability would dampen in the MENA portfolio, especially in Saudi Arabia, Bahrain, Lebanon, and Iraq.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
Zeynep Kosereisoglu, Director for the Middle East and Africa
FrontierView clients: See our upcoming Events to Watch report for further insights
Fed cuts rates another 25bps on concerns over weak investment
Key Takeaways
- The Federal Reserve (Fed) cut its headline interest rate by another 25bps, in line with consensus estimate.
- The Fed notes that weak global growth and trade–related uncertainty were significant factors in the decision to cut rates.
- In a surprise move, the Fed cut the interest rate on overnight reserves–the rate banks receive on their reserve balances–by 30bps, instead of the expected 25bps. The additional cut creates another incentive for banks to lend funds instead of holding cash balances, which was described as a move to improve money market functioning following this spike in repo markets earlier this week.
Our View
Incoming US data over the previous few months has been strong-but the Fed was locked into this rate cut, as failing to cut rates would have disappointed market expectations and triggered a significant selloff in US, and global, asset markets. FOMC Chair Jerome Powell was careful to state during the press conference that the FOMC had no bias–seeking to avoid locking market expectations into future cuts should the US data remain solid, regardless of any ongoing weakness in the external environment.
Business Implications
As laid out in our Global Outlook, the 2020 global outlook is heavily dependent on global monetary easing. China and the ECB have both taken steps in the past months to support their domestic economies through easier policy. This rate cut by the Fed simply confirms our view that the US economy will continue to expand in 2020-with the best opportunities for B2C companies to pursue premiumization strategies. If the US economy slows more than expected, or if the external environment worsens further, expect the Fed to step up its policy support, providing a sort of natural hedge for your NAM targets in 2020.
Ryan Connelly, Practice Leader for Global Economics and Scenarios