The biggest news in markets over the last week has been the attacks on the Abqaiq oil facilities in Saudi Arabia.
The attacks, which amount to one of the biggest disruptions to oil supply on record are expected to temporarily remove half of Saudi oil output, with global production likely to be cut by 5%.
The reaction in markets has been quick and severe, with the price of oil jumping 20% higher at one point, the biggest price move since the 1980’s.
The situation may take months to resolve and indeed could deteriorate in the period ahead, with tensions between the United States and Iran (who are being blamed for the attack) already fraying.
What does it Mean?
In short, the oil price spike is likely to lead to both higher inflation, as well as lower growth, adding to the recessionary fears that are already well-established given market concern about negative yielding sovereign bonds and an inverted yield curve in the United States.
For evidence of the impact of an oil price shock, consider the chart below, which comes from Oxford Economics. It shows the impact on growth rates and on inflation rates in various oil price scenarios.
The chart highlights the fact that as the oil price rises, we should expect to see GDP growth decline and inflation rise. That’s the worst of all outcomes, with John Payne from Oxford Economics stating that higher oil prices could push global inflation rates toward 5%.
To protect against this eventuality, it’s vital that investors have exposure to tangible hard assets, which can protect against inflation. Rare coloured diamonds are one such asset class.