Monday saw oil prices shoot about 20% higher following the attack on the Abquiq Saudi Arabia processing centre over the weekend, which Houthi rebels in Yemen claimed responsibility for, although the White House is saying Iran is the mastermind behind them.
The consequences for FSTE 100 oil giants Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) could be far greater than a simple short-term boost from the oil price jump, however. Looking at the incident, I think both shares could be set to benefit long term.
Oil disruption
The immediate consequences for oil stocks have been clear to see – both Shell and BP have seen their prices climb by about 3% to 5% since the news, a fairly standard move and arguably muted given the large price spike that crude prices themselves have seen.
Both companies have operations in Saudi Arabia (as well as other countries in the region), and so there could be a perceived level of risk that some of their assets could be attacked in a similar way. Saturday’s attacks were on facilities run by the state oil company Saudi Aramco however, and whether Iran is indeed behind the attack could be key to the risk to other operators.
More importantly though, I believe, will be the longer impact on oil prices. Saturday’s attack has hit the supply chain hard – shutting down about half of Saudi Arabia’s oil production, some 5.7 million barrel per day. The Kingdom is the world’s largest single oil exporter, amounting to 10% of global oil supply.
Though expectations are that theses facilities will be back on-line in the not too distant future, the attacks have clearly highlighted a weakness in the world’s oil infrastructure – potentially setting a new benchmark of associated supply risk for crude.
Open hostilities
Of greater concern still, though a potential boon for BP and Shell, is the possibility that recent hostilities will turn more heated. President Trump has taken immediately to rattling the sabre at Iran; already a tense situation following the recent shooting down of a US drone for which Iran was allegedly to blame.
Even if the troubles fall short of an actual war – though President Trump has expressed a willingness if required – political and military conflict in the region always result in oil supply issues and concerns. Higher oil prices over the long term will mean stronger share prices for both BP and Shell.
Investment Case
I focus on BP and Shell as even without this latest trouble, both stocks look like good investments. Strong dividend stocks – both currently yielding 6.3% — they are a strong addition to any income portfolio, and arguably a strong long-term investment.
Both companies have been reporting better than expected earnings numbers in their latest results, and Shell has gone as far as committing $125m in returns to investors through dividends and buy-backs over the next five years. Meanwhile both firms have a number of operations, notably shale, which higher oil prices could bring on-line. If crude fundamentally shifts higher in the long term, both companies are set to reap the benefits.
