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How oil prices reacted to Saudi attacks

Tajinder Dhillon
Tajinder Dhillon
StarMine Research Analyst, Refinitiv StarMine

The oil market reaction to the recent Saudi attacks has been dramatic, with crude prices seeing one of the biggest gains on record. Charts from Refinitiv Eikon highlight the trends, as well as the potential impact on earnings for S&P 500 oil giants.


  1. Damage to key infrastructure in the recent Saudi attacks impacted the equivalent of five percent of global oil production and 50 percent of the country’s output.
  2. Oil prices reacted to the Saudi attacks with the sixth biggest dollar increase in Brent crude since 1970, with the uncertainty increasing backwardation.
  3. We look at select S&P 500 exploration and production companies in light of the oil price rises and analyze post EPS and revenue estimates.


On 14 September, 18 drones and seven cruise missiles targeted prized Saudi Arabian locations including the world’s largest oil processing facility in Abqaiq and the second largest oilfield at Khurais.

Both locations are owned by Saudi state-owned oil company Aramco, which is the world’s most profitable company.

The result was devastating. Key infrastructure was badly damaged, and reports indicated that production of up to 5.7 million barrels of oil per day was impacted. This is equivalent to 5 percent of global oil production and 50 percent of Saudi Arabia’s production.

As the attacks occurred on the weekend, markets had to wait until Monday to find out the impact on oil prices. The question was not if oil prices would rise, but by how much.

When the dust settled, Brent crude jumped US$7.48 a barrel to $67.82, marking the largest dollar increase in over a decade and the sixth-largest increase since 1970. Brent also reached an intraday high of $71.95, which is the largest intraday advance in history.

Refinitiv Datastream chart

Shape of Brent futures curve

Heightened uncertainty around the stability of oil production led to expectations that global crude inventories would tighten, causing a steepening of the futures oil curve.

The shape of the curve can be categorized as either “contango” or “backwardation.”  This is important as it gives insight on market sentiment and expectations.

Backwardation occurs when the spot price for oil is greater than prices trading in the futures market. In other words, consumers are willing to pay a premium to receive oil today than wait for oil to be received in the future.

This behavior exists if markets believe oil is ‘tight’. Indicators of a tight market include low or falling inventories and lower production.

Aftermath of Saudi attacks

OPEC has been aggressively cutting output since the beginning of the year to help balance the market and will continue to do so until March 2020. The Saudi attacks amplify these efforts, as Saudi Arabia plans to call on its oil reserves to supply the market in the interim.

According to the Joint Organizations Data Initiative, Saudi Arabia has reserves of approximately 188 million barrels located across strategic locations.

If we assume this reserve is used to supply the potential five million barrel shortfall in its entirety, it would take 38 days for it to be completely depleted. This is unlikely to occur as Saudi Arabia subsequently surprised markets by announcing it would restore most of the lost production by the end of September.

The image below highlights backwardation in effect. We can see how oil prices today are more expensive than prices into the future. The curve dramatically steepened on 16 September as oil prices rallied.

Exhibit 2: Brent Crude Futures CurveSource: Eikon by Refinitiv

Impact on earnings expectations

Whether the spike in oil prices will persist, there will be immediate impacts on many industries including airlines who use jet fuel, or air freight and logistics companies such as FedEx and UPS.

Those who should benefit from a higher price include oil extraction companies.

When looking at select S&P 500 exploration and production companies, we note the negative sentiment coming from sell-side analysts. As shown in the below image, 2019 Q3 earnings per share (EPS) and revenue estimates have been downgraded substantially over the last year according to I/B/E/S data from Refinitiv.

EPS estimates have been slashed by 40 percent on average, while revenue estimates have declined by 5 percent (if Occidental Petroleum is excluded, this drops to 12 percent).

Exhibit 3: Estimate Revisions for S&P 500 Exploration & Production CompaniesSource: I/B/E/S data from RefinitivAs of now, all five companies shown above are expected to miss earnings expectations in 19EQ3 when looking at the StarMine Predicted Surprise.

If analysts raise their estimates given the spike in oil, investors could benefit from a possible positive surprise when companies begin reporting their earnings.

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Original article published on 24 September.