Oil production, price impacts | Data signal economic slowdown in China | UAW strike
In today's updates:
* Oil futures surge following attack on Saudi oil fields, facilities
Markets: U.S. equity futures are tracking losses in Europe. Helping temper U.S. equity losses are rises in Exxon Mobil, Chevron and other energy stocks, which are getting a boost following the jump in oil prices. Gold jumped with silver, the yen rallied during a Japanese holiday and Treasuries halted an eight-day slide. The dollar was steady. Corn futures could see a rally as the surge in oil prices may encourage greater demand for ethanol.
—Update on attack on Saudi oil fields, facilities.
- Brent crude futures surged as much as 20% — the biggest percentage spike in almost three decades, since Saddam Hussein invaded Kuwait in 1990 — as Saudi Arabia rushed to restore oil production after a drone strike on a key Aramco facility cut its output in half, removing about 5% of world supply. Brent crude oil, the international benchmark, gained almost $12 to trade as high as $71.95 a barrel, before easing back to $65.21, still up by 8.5%. The U.S. benchmark, West Texas Intermediate, was up by as much as 16% to $63.64 a barrel before easing gains to $59.25 or up 8%.
- Price impacts. Eurasia Group, a consultancy, said the weekend’s events “will encourage markets to re-examine the need for considering an oil geopolitical risk premium” and said a prolonged outage could lead to a $10 a barrel increase in prices. "No matter whether it takes Saudi Arabia 5 days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend's drone attacks on the Kingdom's infrastructure — that infrastructure is highly vulnerable to attack," according to analysts at Citi. "The market needs to price in a new level of supply chain vulnerability, with the speed Saudi can come back important not just for this instance but for future disruptions as well," added JPMorgan.
- Oil and gas production impacts. Riyadh's national oil company expects to restore roughly a third of crude output disrupted by the attacks by the end of today, Saudi officials said, but the country is likely to remain short of full production capacity for weeks. Saudi energy minister Prince Abdulaziz bin Salman said early estimates showed that the attack caused a suspension of crude oil supplies of 5.7 million barrels or more than 50% of daily production. But he added that part of the loss of supplies to customers would be offset from inventories. He also said gas production had fallen 50% as a result of the attack. “This terrorist attack is an extension of recent attacks that targeted oil and civilian infrastructures and pumping stations and oil tankers in the Arabian Gulf,” Prince Abdulaziz said. “These attacks do not only target the kingdom’s vital installations but also international oil supplies and threaten their security.” Saudi Arabia supplies more than 10% of global crude and is the world’s largest exporter of oil. The loss of more than 5 million barrels a day would be the equivalent of 5% of global oil supply.
- The International Energy Agency and the U.S. Department of Energy said they have ample emergency reserves which they could turn to in the event of a prolonged disruption.
- U.S. oil reserve. The Department of Energy (DOE) said: “The secretary [of energy] has been briefed on today’s drone attack in Saudi Arabia and stands ready to deploy resources from the strategic petroleum oil reserves(SPR) if necessary to offset any disruptions to oil markets as a result of this act of aggression. The Secretary has also directed DOE leadership to work with the International Energy Agency on potential available options for collective global action if needed.”
- Japan has more than 230 days of oil reserves and is prepared to release them in cooperation with the IEA and other countries if needed to ensure stable supply, the Minister of Economy, Trade and Industry said in a statement. Minister Isshu Sugawara issues statement following drone attack on Saudi oil facilities. Markets in Japan are closed today for a holiday.
- President Trump said on Sunday that the U.S. was “locked and loaded” but would consult with Saudi Arabia after attacks against major Saudi oil facilities over the weekend. Trump met with Defense Secretary Mark Esper on Sunday afternoon.
- Washington released satellite photographs showing what officials said were strikes from the northern Persian Gulf — Iran or Iraq — rather than from Yemen, where the Houthi militia claimed responsibility for the attacks operates. Saudi Arabia photographs showed at least 17 points of impact at several Saudi energy facilities from strikes officials said came from the north or northwest. That would be consistent with an attack coming from the direction of the northern Persian Gulf, Iran or Iraq.
- Iran has dismissed the possibility of a meeting between its president, Hassan Rouhani, and President Trump at the United Nations next week, state news media reported today.
- The attack on Abqaiq, a crude processing center southwest of Aramco’s headquarters in Dhahran that prepares almost 70% of the kingdom’s crude for export, is of particular concern because the complex facility is vital to crude output. The Khurais oilfield was also targeted.
- FBI Director Christopher Wray last October warned a Senate committee that civilian drones pose a “steadily escalating threat.” The devices are likely to be used by terrorists, criminal groups or drug cartels to carry out attacks in the U.S., he said.
— U.S./China trade policy update:
- China data showed growth slowed further in August. Industrial output rose 4.4% from a year earlier, versus a median estimate of 5.2%, and the weakest in 17.5 years, amid spreading pain from the trade war with the U.S. and softening domestic demand. Meanwhile, retail sales and fixed-asset investment also fell short of the forecast increase. The data is reinforcing views that China is likely to cut some key interest rates this week. Ahead of the data, Premier Li Keqiang said it would be "very difficult" for the economy to grow at 6% or more and that it faced "downward pressure."
- Unrest in Hong Kong entered its 15th week, as police and protesters clashed across the territory. Police fired water cannon and tear-gas to disperse protesters throwing petrol bombs at government buildings.
- Sens. Chuck Schumer (D-N.Y.) and Tom Cotton (R-Ark.) will urge the FCC to consider whether two Chinese telecom companies should be barred from operating in the U.S., citing national security concerns. Link to NYT article.
- China's pig herd falls 38.7% in August vs year ago: Ag ministry. China's pig herd fell by 38.7% in August versus a year ago, according to data published by China's Ministry of Agriculture and Rural Affairs last week, marking another record drop as the impact of a year-long epidemic continues to emerge.
— U.S. to agree not to hike tariffs on Japan autos: Japan newspaper. Japan and the U.S. are working toward a joint leaders’ statement that would include a U.S. promise not to hike tariffs or introduce quotas on Japanese cars, the Tokyo Shimbun newspaper said today. The statement is set to be issued after a meeting between President Donald Trump and Japanese Prime Minister Shinzo Abe in New York, the paper said. The two leaders are also expected to sign a broader bilateral trade agreement at the meeting.
Japan will reduce or abolish tariffs on U.S. beef, pork and wheat in line with previous agreements under the regional trade partnership rejected by President Trump in 2017, the paper reported, without citing sources. The new bilateral trade deal is set to be finalized at cabinet level before the summit, the Tokyo Shimbun said.
The tariff-free quota allowed for imports of U.S. rice to Japan will be substantially smaller than the 70,000 tons agreed under the Trans-Pacific Partnership (TPP), the Tokyo Shimbun and the Mainichi newspaper said.
Japan’s tariffs on U.S. wine will be reduced to zero in seven years, the Tokyo Shimbun added, helping it to compete with rivals such as Australia and the European Union, with which Japan already has trade agreements.
— Other items of note:
Auto workers strike against GM in contract dispute. More than 49,000 members of the United Auto Workers walked off General Motors factory floors or set up picket lines early today as contract talks with the company deteriorated into a strike. The walkout came despite a deadline-day offer by GM for pay raises, $7 billion of investment in eight U.S. plants and more than 5,400 additional jobs, most of which would be new hires. The union said GM’s proposal fell short in key areas including health care, use of temporary workers and the length of time it takes for shorter-tenured members to get to top-scale pay. The union is seeking pay raises for entry-level workers, and want GM to invest in U.S. plants and possibly build new vehicles or power trains in some of the four factories that currently have no future products to produce. Shutting down North American production will cost GM about $400 million a day, according to Kristin Dziczek of the Center for Automotive Research, adding that "GM has enough inventory for a short strike of one or two weeks. After that it starts to get painful." The strike does not include Ford and Fiat Chrysler, whose UAW contracts were extended while the union tries to negotiate a deal with GM.
Gun-control legislation. House Speaker Nancy Pelosi (D-Calif.) and Senator Chuck Schumer (D-N.Y.) said they would join President Trump for a ceremony to sign into law proposed gun-control legislation, putting pressure on Republican lawmakers to back the bill. Link to NYT article.
A bipartisan group of lawmakers is trying to curtail President Trump’s authority to levy tariffs. Link to WSJ article.
Top Democrats called for Brett Kavanaugh’s impeachment. Elizabeth Warren joined Kamala Harris and Julian Castro after reports of another allegation of sexual misconduct surfaced against the U.S. Supreme Court justice. Kavanaugh was confirmed last year amid similar accusations. President Trump said the judge should sue. More than a day after publishing an exposé detailing a new sexual misconduct allegation against Kavanaugh, the New York Times added a significant passage, along with an editor's note, that undercuts the claim.
Purdue Pharma files for bankruptcy protection. The OxyContin maker filed for bankruptcy with a partial deal aimed at resolving thousands of state and local lawsuits accusing it of fueling the opioid crisis.
Canada’s Greens. Climate change is a key issue for voters ahead of Canada’s October elections. Polls show that the country’s Green Party has tripled its support — to 11% of the public — and could be necessary to form a coalition.
— Markets. A jump in oil prices pushed the yields on 10-year U.S. Treasuries down by 0.044 percentage point, to 1.852%. Gold climbed almost 1% to $1,501.84 an ounce.