Oil holds huge gains after Saudi blasts, Fed decision in view

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Oil prices dipped on Tuesday but held most of the previous day’s record gains following an attack on Saudi facilities that wiped out half the country’s output, with traders nervously awaiting the US response after it said Iran was likely to blame.

The crisis revived fears of a conflict in the tinderbox Gulf region and raised questions about the security of crude fields in the world’s top exporter as well as other producers.

 

It has also taken attention away from the upcoming trade talks between China and the US, as well as a much-anticipated policy meeting of the Federal Reserve (Fed), which is expected to cut interest rates.

Trump said he was ready to help Riyadh following the strikes, but would await a “definitive” determination on who was responsible.

Iran-backed Huthi rebels in Yemen have claimed responsibility, but Washington and Riyadh have pointed the finger at Tehran, which denies the accusations.

Trump appeared to temper his earlier warning that the US was “locked and loaded” to respond, saying: “I’m not looking to get into a new conflict, but sometimes you have to.”

Faint hopes for talks between the US and Iran to ease tensions at the UN General Assembly this month were ruled out by supreme leader Ayatollah Ali Khamenei on Tuesday.

The weekend’s attack sent both main oil prices surging almost 15 per cent on Monday and they managed to hold most of those in early Asian trade with West Texas Intermediate and Brent dipping a little more than one per cent.

 

Uncertainty and geopolitical fears left Asian equities mixed, having enjoyed an upbeat month thanks to easing trade war tensions and fresh easing measures by global central banks.

Vulnerability

Hong Kong fell 1.2 per cent with sometimes-violent unrest in the city adding to investor woes and dragging on the economy.

Tokyo ended up 0.1 per cent – marking a ten-day winning run – as investors returned from a long weekend, Shanghai slipped 1.7 per cent, Sydney added 0.3 per cent and Singapore retreated 0.6 per cent.

Taipei, Mumbai and Manila were also lower, though Seoul, Wellington, Bangkok and Jakarta rose slightly. The Cambodia Securities Exchange index soared 6.82 per cent.

In early trade, London reversed initial losses to rise 0.2 per cent, while Paris was up 0.1 per cent and Frankfurt was flat.

“Geopolitical uncertainty is certainly nothing new in the Middle East. However even by recent standards, yesterday’s [Monday’s] sharp rise in oil prices . . . was a historic move,” said CMC Markets UK chief market analyst Michael Hewson.

“The size of the move has raised concerns that if sustained, a rise in prices could prompt further weakness in a global economy already vulnerable to concerns about slowing demand.”

But while there are fears of a conflagration in the Middle East, observers said the chances of that were low, with Jeffrey Halley, senior market analyst for the Asia-Pacific at Oanda, saying both sides lacked the appetite for conflict.

He added the most likely outcome would be more severe sanctions on Iran, though he pointed out: “What is clear is that Saudi Arabian oil infrastructure is more vulnerable than thought, and a risk premium will be built into oil prices going forward.”

‘Pave the way’

Analysts said the Fed would probably consider the Saudi attack’s possible impact on the economy and prices when deciding on its next monetary policy move this week, but tipped it to cut borrowing costs after its meeting on Wednesday.

Also providing some optimism was news that Chinese vice finance minister Liao Min will visit the US on Wednesday to “pave the way” for the higher-level talks planned for next month.

On foreign exchanges, the aversion to riskier assets pushed the dollar up against high-yielding currencies, while the pound fought to recover from Monday’s losses.

Sterling dropped on Monday after European officials said British Prime Minister Boris Johnson had offered no new, viable ideas to break the Brexit impasse during talks with EU chief Jean-Claude Juncker.

Investors are now awaiting a decision by the UK Supreme Court on whether Johnson’s decision to suspend parliament for more than a month was lawful.