Markets
Brent Settled at $113.17, Its Highest Close Since May, After a Drone Strike on Saudi Aramco's Shaybah Field Killed Two. WTI Ended 47 Cents Short of $100
Brent crude rose 4% to settle at $113.17 a barrel on October 22, its highest close since early May, after a drone strike on Saudi Aramco's Shaybah field killed two people and Houthi rebels claimed attacks on Yanbu. WTI gained 2.4% to $99.47 as reports of US and Israeli plans for renewed strikes on Iran after the midterms kept a floor under prices.
The oil market spent most of October pricing a war at sea. On Thursday it priced attacks on land. December Brent rose $4.35, or 4%, to settle at $113.17 a barrel, its biggest gain in about two weeks and its highest close since May 4, and December West Texas Intermediate rose $2.32, or 2.4%, to $99.47, according to settlement data reported by Bloomberg and The Nation. Brent is now up more than 80% this year. Diesel and other refined products rose more than crude, a reminder that the tightest part of the market is not the barrel but what is made from it.
The news came from inside Saudi Arabia. A drone strike on Saudi Aramco's Shaybah oil field, in the Empty Quarter near the border with the UAE, killed two people, although Aramco said operations were unaffected. An attack on King Fahd International Airport in Dammam caused casualties, and Yemen's Houthi rebels claimed attacks on the Red Sea port of Yanbu within the previous 48 hours. The United States ordered some personnel and family members to leave its embassies in the kingdom. Separately, the New York Times reported that the US and Israel had drawn up plans for renewed strikes against Iran after the November midterm elections, citing US officials.
What makes the move notable is that the physical flow of crude is not the problem. Exports through the Strait of Hormuz have returned to pre-conflict levels, according to Bloomberg, and Kuwait's state producer said it is exporting as much crude as before the war, although it needs more tankers for jet fuel and diesel. Iran's Revolutionary Guard said it had hit four "violating" tankers in the northern Gulf, and Tehran threatened to widen the conflict if "illegal" transits continued. "Continued kinetic activity and the risk of renewed escalation following the midterms are keeping a floor under prices," said Rebecca Babin, senior energy trader at CIBC Private Wealth Group. In other words, the premium in Brent is a premium for what might happen, and Thursday added a new place where it might.
The $13.70 gap between Brent and WTI at the settle is itself part of the story. The two benchmarks usually trade a few dollars apart; a spread this wide says that the risk is concentrated in seaborne Middle Eastern supply that prices off Brent, while US crude at Cushing, Oklahoma is relatively insulated. For US stocks, oil at these levels feeds straight into rate expectations: traders were pricing a December Fed hike with about a 90% probability on Thursday, even as the 10-year Treasury yield fell about 20 basis points to 4.95% in the flight from technology stocks. The next inflation readings will show whether consumers are pricing it in as well.