Recently, an Iranian-aligned group from Yemen called Houthis attacked Saudi Arabia using missiles and drones, including one targeted at a facility important for oil exports. Although most of the missiles and drones were intercepted, Brent prices nevertheless briefly rose over $70 per barrel for the first time since early 2020.
Saudi Arabia is arguably the most influential nation in the oil market. The country exports a lot of oil and also has considerable spare capacity, which is potential production that it can turn on quickly to meet market demand. In the past, Saudi Arabia has used its spare capacity capability to influence overall oil supply and as a result, its actions and internal developments can affect oil prices considerably.
Given how influential Saudi Arabia is in the oil market, here’s what I think the recent attack on Saudi Arabia means for the BP (LSE: BP) share price and the Royal Dutch Shell (LSE: RDSB) share price.
What it means for the BP and RDSB share prices
Although oil prices rose initially, I don’t think the attack matters that much to the BP share price or the RDSB share price, because I don’t think the attack has any medium term effect on oil prices.
First, the attack failed to actually disrupt oil exports so Saudi Arabia still has the same capacity as before. As a result, oil supply didn’t change as a result of the attack.
Second, oil inventories are pretty high in many places around the world due to the pandemic. With higher oil inventories, any potential disruption in Saudi Arabia production or exports wouldn’t be as big of a problem as it would have been before. The higher inventories give more time for other countries to ramp up their production or exports if needed.
Speaking of production, many countries around the world are holding back oil production due to a OPEC+ agreement. If Saudi Arabia’s oil production is actually disrupted, I reckon other countries could step up their production to compensate.
Lastly, the US has committed to defending Saudi Arabia and, with US military technology, I reckon any additional attacks would be considerably harder.
What I’d do
Although the attack is in the news, I reckon what matters a lot more to the BP share price and the RDSB share price is the battle between Covid-19 vaccines and variants.
If the variants prolong and worsen the pandemic, demand for oil might not be as strong as expected and oil prices could decline. If oil prices decline substantially, I reckon the BP share price and RDSB share price could both fall too.
BP and Royal Dutch Shell will also both need to successfully transition to green energy. Although the two have many resources, the transition won’t be easy. More companies such as Volvo are committing to producing all electric vehicles in the future and the return on green energy itself might not be as attractive as it was for many major oil projects in the past.
Given the current oil price, however, I think both stocks could be attractive. Both companies also have substantial non-oil businesses in natural gas or convenience stores, and both have credible plans to adjust to a more sustainable future.