INR update: Oil supply restoration news to drive markets

The attack on Saudi oil reserves comes after Trump fired Bolton (his National Security advisor) who was seen as an overt hawk on US-Iran relations. Observers thought that Trump might be moving towards a deal with Iran which has now become difficult given that Iran has been blamed for the attack by Saudi Arabia. The timing of the attack suggests that the same has been carried out to ensure isolation of Iran from the international energy markets via US sanctions.

Saudi Arabia on the other hand has downplayed the impact asserting that they will restore one third of the lost supply by today itself. One news report suggested that Saudi Arabia will restore 100% of lost supplies by tomorrow (Tuesday). Saudi Arabia’s motive to restore supply as soon as possible is to indicate that its facilities are not vulnerable to geo political tension. This assertion is in turn motivated by getting a better valuation for Aramco it seems.

The disruption in oil supply is the largest the world has seen since the gulf war in 1992. The total disruption is 5% of global oil supplies which commodity experts suggest is significant to take Brent prices towards 70, i.e., if the disruption is sustained.

Therefore at the moment news from Saudi Arabia about restoring oil supplies would determine direction for oil prices and by tomorrow morning the supply shortfall should be clearer. If the supplies are restored then we can expect a pull back in oil towards 64 levels.

Trump on the other hand has become dovish on his international relations outlook last week and it would take some time for him to change his stance on Iran again.

Therefore incoming news would determine the direction of oil prices and risk sentiments globally. USDINR should track oil directly. In the absence of fresh news we could see USDINR heading to 71.30 today while a closing above 71.60 would indicate elevated concerns on account of recent events.