By now you've heard the news: Over the weekend, Saudi Arabia's oil industry suffered crippling attacks from drones alleged by some to have been launched by Houthi fighters in Yemen -- and alleged by others to have been sponsored by Iran.
Saudi Arabia temporarily shut down about half its daily production of oil while it gets the damage repaired, instantly taking about 5% of global oil production off line.
Oil markets quickly went berserk, with WTI crude prices surging 12.8% to close just shy of $62 a barrel, and Brent crude prices jumping more than 13% to close above $68 a barrel.
Oil stocks rose in tandem. By the closing bell, stocks in the following oil majors had jumped:
- ConocoPhillips (NYSE:COP) -- up 9%.
- Hess (NYSE:HES) -- up 11.2%.
- Canadian Natural Resources (NYSE:CNQ) -- up 13.1%.
- Apache (NYSE:APA) -- up 16.9%.
- Continental Resources (NYSE:CLR) -- up 21.8%.
Now admittedly, these gains may not last forever. Saudi Arabia was aiming to bring about one-third of the production capacity that it shut down over the weekend back on line by the end of today. Still, that would leave global oil production capacity down by ... let's see here, two-thirds times 5% equals about 3.3%, give or take. That's not an insignificant amount.
The bigger risk, though, is this -- and if you ask me, this is what helps explain why so many oil stocks today shot so much higher than the price gains in oil: The Saudi government, and President Trump in the U.S., are both blaming Iran for the attacks in Saudi Arabia, with the Saudis alleging the Houthis used Iranian weapons in their attacks.
The president is promising a "proportionate" response, and the Saudis are promising to "forcefully respond to these aggressions." This raises the risk that what began with a short-term hiccup in oil supplies over the weekend could break out in a protracted shooting war in the most important oil-producing region on the globe.
While we certainly hope that doesn't happen, there's still the prospect that it could keep oil prices -- and oil stock prices -- elevated for some time to come.