It has been a busy week for oil traders, and indeed for anyone that follows energy markets and stocks. When news of a drone attack on Saudi oil facilities on Saturday broke, futures surged over nine percent. Then, on Tuesday, when the Saudis claimed that output would return to normal and President Trump talked of the U.S. releasing strategic reserves to stabilize the market, crude gave much of that back. That kind of short-term, news-driven volatility is worrying for traders and investors, but now that the dust has mainly settled, what does it mean for oil?
From both a fundamental and technical perspective, the events of this week have changed the picture dramatically. Even after Tuesday's retracement, crude futures remain well above Friday’s closing level, and for good reason.
There is a good chance that the Saudis could be overly optimistic in their assessment of the damage, but even if they aren’t, the attacks accentuate a risk factor that the markets had been largely ignoring before last week. Tension in the Middle East is nothing new, so some degree of potential disruption is always priced into oil, but the situation now is riskier than usual for several reasons.
The Saudis and Iranians have been involved in proxy wars in both Yemen and Syria for a while. The massive toll in blood and treasure taken by that kind of conflict makes escalation always possible as desperation increases, but the current situation of Iran makes it almost inevitable.