With plenty of reserves on hand, Adam Button points out that market reaction to the attack on Saudi crude production is based on a rise in geopolitical risk.

Crude oil prices are up 8%, paring earlier gains of nearly 20% seen at the Asia open following the wide-ranging attack on Saudi oil infrastructure. The price spike signaled geopolitical worries rather than a loss of production. The chart below shows the attack caused the biggest supply disruption in history, exceeding supply shocks caused by the Iran revolution and the Arab oil embargo. The Japanese yen and Canadian dollar are Monday’s FX winners.

, but gold and silver are up against all currencies, recovering from last week's metals slump.

The Empire Fed (ISM from NY Fed) is due later, but world markets remain fixated on the U.S. and Saudi response. Do not forget Today’s UK Supreme Court ruling on whether Prime Minister Boris Johnson's prorogation of Parliament was legal. Then, all eyes shift to Wednesday's Fed decision and Trump's reactions. 

Saudi Strike Upends More Than Oil - Oil Disruptions (Chart 1)

Japanese markets were closed to start the week but that did nothing to stop a wild open. Brent rose as much as $11.70 to hit $71.95 – the highest since late-May. WTI hit $63.54. The Dow Jones Index and S&P 500 futures were down by as much as 200 and 25 respectively before stabilizing.

The attacks cut Saudi production roughly in half, taking 5.7 million barrels per day out of service. Videos of the facilities showed massive fires and report said it will take “weeks not days” to fully restore operations. At the same time, some (if not most) of the production could be restored within a week.

Given ample supplies and reserves globally – including large amounts of oil in storage in Saudi Arabia – the moves in oil cannot be justified by fundamentals. Instead, it's the geopolitical risk that goes along with the attacks, as signified by the $20 jump in gold prices in early trading.

Houthi rebels in Yemen claimed responsibility for the attack, and if that's the case, it marks a leap forward in their offensive capabilities, proving a continuous threat to Saudi oil. The United States however, insisted on blaming Iran, which could lead to U.S. and Saudi strikes in retaliation – something that risks sparking open war. U.S. Secretary of State Mike Pompeo openly pointed the finger at Tehran, but so far President Trump has refrained from doing so directly If he does, it may signify an imminent reprisal. So far, he has said the United States is “locked and loaded” for a response but wants to hear from Saudi Arabia first.

In forex, the Canadian dollar is the early leader with the Japanese yen and Swiss franc both attracting bids. The U.S. dollar is generally stable elsewhere. It also adds a wrinkle to Fed thinking. Higher gasoline prices are undoubtedly inflationary, but the attacks add a further geopolitical risk.

There are still some final data points for the FOMC to consider as well, including Monday's Empire Fed. The consensus is for a +4.0 reading.