Strikes dent oil supply

Price rise predicted to bring on rate cuts

GLOBAL oil prices have spiked by the most on record after drone strikes on two major Saudi Arabian facilities knocked out 5 per cent of the globe’s daily crude supply.

Economists say any sustained rise in oil prices linked to the attacks will slow global growth and pave the way for more interest rate cuts.

The attacks stand as the single biggest disruption to the global oil market, surpassing that delivered by Saddam Hussein’s invasion of Kuwait in 1990 or the Islamic Revolution in Iran in 1979, an analysis by Bloomberg found.

But Australian investors took the development in their stride yesterday as strong gains by oil and gas producers including Woodside Petroleum, Santos, Oil Search and BHP dragged the overall market slightly higher.

The price of Brent crude, a major oil benchmark, surged by almost $US12 a barrel, or 20 per cent, in the opening seconds of trade in London.

That trading was in crude futures – fixed contracts where the buyer agrees to buy a certain amount of the commodity at a set date in the future.

It was the biggest intra-day jump in dollar terms since Brent futures were launched in 1988, and took the price of a barrel of crude to almost $US72 a barrel.

The US oil benchmark, West Texas Intermediate, jumped 15 per cent in early trade to $US63.34 a barrel.

Iran-backed Houthi rebels in Yemen claimed responsibility for the attacks, which have halved Saudi’s daily output.

CommSec chief economist Craig James said the world was waiting to see how quickly Saudi Arabia could bring its production back online.

A sustained lift in oil prices would weigh on the global economy and open the way for further interest rate cuts from central banks, Mr James said.

“If (oil) prices were higher for a sustained period, we would expect central banks to be more aggressive in cutting interest rates,” he said.

“Governments may also be more active in injecting fiscal stimulus into local economies.”

AMP Capital chief economist Shane Oliver said a longterm rise in oil prices would weigh on both the global economy and consumer spending in Australia, providing a fresh headache for the Reserve Bank.