Oil prices: this will be a week to watch!

Oil markets are very tight at the moment with Saudi Arabia pumping at 9 million barrels per day, or close to full capacity, according to industry analysts. This means there is little spare capacity to handle a supply side shock caused by terrorist attacks.

Now the terrorist atrocities that left more than 20 dead in the Saudi Arabian oil city of Al Khobar at the weekend failed to actually harm productive oil capacity, but they did serve to underline the vulnerability of oil installations to terror attacks. In short, this was the next worst thing to a successful interruption of the oil supply for oil prices.

We can therefore anticipate the highest oil prices in more than two decades in the week ahead.

It is doubtful whether there is anything that Opec can say from its meeting in Beirut this week that will seriously dampen this upsurge in pessimism, and their best counsel might be to keep anything they have up their sleeve until things are a bit calmer. Then it might have an effect.

What markets will sense is that the situation in Saudi Arabia is getting worse and not better. We have had several attacks on Westerners this month, and the latest is the worst; so better to price in a further deterioration than to hope for a better day.

The industry will be looking for signs from the Saudi Government that it has the terrorists on the run. Oil industry chiefs met the Saudi Oil Minister Ali Al Naimi last week and got just such an assurance, just before the incident in Al Khobar this weekend.

Markets are always driven by events rather than words, and it will be interesting to see how far good intentions can tackle bad events this week, although the performance of the Saudi special forces in saving many hostages in Al Khobar is a positive factor.

It is thus hard to imagine a more troubling backdrop for the oil market in the week ahead, apart from a direct hit by terrorists on a major oil installation. Higher oil prices look inevitable.