 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Monday's Headlines 1. Markets Fall as Oil Spikes on Saudi Oil Attacks 2. Brent Oil Futures Have Biggest One Day Gain Ever 3. UAW Walks out on GM Markets Closed
 photo: Getty Images
Markets Today
Saturday's drone attack on Saudi Arabia's oil facilities has disrupted 5% of the global oil supply and caused prices to skyrocket. The attack, which involved 10 automated drones, wiped about half of the state-owned Saudi Aramco's supply, or 5.7 million barrels a day. It was claimed by Yemen's Houthi rebels, but the Trump Administration says Iran was the staging ground for the attacks.
Read more: Drone Attack on Saudi Oil Fields Rattles Markets
Oil prices shot up on concerns of supply and rising geopolitical tensions. Brent crude oil futures, which is the international benchmark for oil prices, rose as much as 19.5% to $71.95 per barrel at the open, the biggest jump on record. West Texas Intermediate oil futures rose as much as 15.5%, the biggest one day jump since December, 2008.  The attacks occurred at an oil processing facility at Abqaiq and the nearby Khurais oil field. Saudi Aramco reportedly aimed to restore about a third of its crude output, or 2 million barrels by the end of the day, Monday. However, Bloomberg News reported it could take weeks before Aramco restores the majority of its output at Abqaiq.
Saudi Arabia, an OPEC member, is the second largest oil producing nation in the world, responsible for 18% of global production. Abqaiq is the world's largest oil processing facility and crude oil stabilization plant with a processing capacity of more than 7 million barrels per day, per Saudi Aramco. Khurais is the second largest oil field in the country with a capacity to pump around 1.5 million barrels per day. In August, Saudi Arabia produced 9.85 million barrels per day.
Saudi Aramco has been planning an IPO to raise tens of billions of dollars, but those plans have already been delayed for other reasons. This weekend's attack may postpone its plans yet again, depriving the Saudi national oil giant from tapping the public markets for capital it needed as oil prices have been in decline over the past few months.  The Downstream Impact of the Saudi Attacks Apart from today's market reaction to the weekend attacks, there is a broader concern that these higher oil prices might be with us for awhile as supply remains compromised and the security concerns around protecting oilfields becomes paramount.
As you may remember, OPEC's members have been tightening supply to boost falling oil prices all year as demand has waned due to a global economic slowdown and the trade war. That was an effective strategy until late April when the U.S. China trade talks went off the rails, and concerns about a global recession were amplified.  If crude oil futures remain at these levels or go higher, that will translate into higher gasoline prices, higher jet fuel prices and increased costs for cargo and shipping.
The U.S. (apart from California) has benefited from relatively low gasoline prices all year, which has helped propel consumer spending. It usually takes several weeks for crude oil prices to impact gasoline prices, but this type of supply shock introduces all kinds of uncertainty into the commodities market. That could translate into higher prices for all kinds of oil derivatives much faster than usual.  Airline Impact Airline stocks, which are sensitive to oil prices for obvious reasons, traded lower today in reaction to the spike in prices. It's important to note that airlines hedge their jet fuel purchases and typically buy way in advance of when they will need the fuel. They don't buy on the open market like we do as car owners. The fact that investors sold airline stocks so hard today may be a reflection that experts think these high prices will be here for awhile.
Oil producers, naturally, traded higher on the news. Devon Energy climbed more than 12% and Marathon Oil climbed 11.8%. Both of these oil producers are mostly U.S. focused and investors clearly think they will benefit if Saudi oil is compromised.
The Energy Select Sector SPDR Fund (XLE) had its best day of the year, jumping 3.41%.  UAW Strikes Against GM
The United Auto Workers, the largest auto workers union in North America, walked out on General Motors today after the two sides could not reach an agreement on the following issues:
A key point in the negotiations, per the WSJ, is GM's desire to use more union members classified as temporary workers, which helps it quickly cut production if the U.S. vehicle market contracts. GM executives have told investors that the company is better positioned to sustain profitability in a downturn because a larger percentage of its union workforce—including both temporary workers and some others—have relatively limited layoff benefits because of concessions won in past contracts.
In a statement on its website, the UAW lashed out at GM for not negotiating with its members a decade after the union stood by GM in its darkest days during the financial crisis.
"We stood up for General Motors when they needed us most. Now we are standing together in unity and solidarity for our Members, their families and the communities where we work and live."
UAW workers walked out of GM's U.S. plants today, which will severely hamper its truck production capabilities for the North American market. Trucks and SUVs are the most profitable vehicles GM and Ford make, and GM has moved much of its car production overseas to Mexico and Canada. Estimates of how much the strike could cost GM range from $50 million to $100 million per day, which would eat into the automaker's already lean profits.
Shares of GM fell more than 4% today, and are up 10% year to date. 
chart courtesy www.koyfin.com  Did we mention that domestic oil producers and drillers spiked today on the news out of Saudi Arabia? So did oil services companies like Halliburton.  Airline stocks git hit hard by the spike in oil prices, but none more than American Airlines, which has one of the biggest fleets. GM fell more than 4% today, and it could be just the beginning of a long slide for the automaker if the strike persists.  Word of the Day: A supply shock is an unexpected event that changes the supply of a product or commodity, resulting in a sudden change in price. Supply shocks can be negative—decreased supply, or positive—increased supply; however, they're often negative. Assuming aggregate demand is unchanged, a negative supply shock causes a product's price to spike upward, while a positive supply shock decreases the price.  (image courtesy oteo.com)
Today in Automotive History Sept. 15, 1908: General Motors files papers of incorporation. (Not kidding... totally serendipitous)
On September 16, 1908, Buick Motor Company head William Crapo Durant spends $2,000 to incorporate General Motors in New Jersey. Durant, a high-school dropout, had made his fortune building horse-drawn carriages, and in fact he hated cars–he thought they were noisy, smelly, and dangerous. Nevertheless, the giant company he built would dominate the American auto industry for decades.
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Monday, September 16, 2019
Supply Shock
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