A drone attack on oil facilities in Saudi Arabia over the weekend has sent oil prices surging as production and raises another geopolitical risk that many had considered dormant. 
An attack at two facilities in Abqaiq and Khurais resulted in the production suspension of 5.7 million barrels of oil per day by state-owned oil company Saudi Aramco.
While fires at the plants had been contained, the firm noted, it remains unclear when production will return to normal.
According to Craig Erlam, senior market analyst for UK and Europe, the Middle East & Africa at OANDA, the attack wiped out around half of Saudi Arabia’s production and representing around 5 per cent of global daily output.
The attack was claimed by Houthi rebels in Yemen where Saudi Arabia has been involved in a civil war over the past few years in support of ousted president Abbrudah Mansour Hadi. The conflict has become viewed as a proxy war between Saudi Arabia and its allies and regional rival Iran for dominance in the Gulf.
However, US authorities have cast doubts on the claim arguing that the attack is more likely to have been carried out by Iran based on the type and direction of attack.
The further escalation of hostilities between the two regional powers though could lead to further destabilisation in what is already a volatile region.
Adrian Lowcock, head of personal investing at Willis Owen, said the attacks were likely to leave oil prices high for some time as it remains unclear whether there will be any further attacks.
“Whilst it would be speculative to invest in oil on the back of such uncertainty investors should consider the wider impact,” he said.
“A high oil price will affect the global economy and act as a drag on business as oil remains the lubricant which keeps economies functioning.”
Nitesh Shah, director for research at ETF provider WisdomTree, said that oil prices had been trending lower over the past three months but that has now changed in early trading since the attacks.
This had been fuelled by the absence of news from the region leading markets to believe that there had been a de-escalation of risks in the region.
“Clearly events of over the past few days fly in the face of de-escalation,” he said. “We believe the geopolitical-premium in oil will rise as the risk of military intervention in the region is growing by the day.”
While the hit to production volume is large, the political ramifications are larger still, said Shah with the potential to turn into a hot war between the two.
“The Saudi-Yemen war that has been waging since 2015 has been widely seen as a proxy war between Saudi Arabia and Iran,” said WidomTree’s Shah. “That could morph into an overt war with Iran.
“Iran had been rattling its sabres via its proxies – undertaking attacks on vessels moving in and around the Strait of Hormuz – the world’s most important oil transit chokepoint – in May and June 2019.”
Performance of indices over 3mths
Source: FE Analytics
George Lagarias (pictured), chief economist at Mazars, said that the attacks had “effectively wiped out the world’s spare capacity” and prompted US president Donald Trump to release strategic reserves into the market.
Nonetheless, long-term investors in oil should be aware that a higher geopolitical premium is “business as usual” for what is a strategic rather than a financial asset, said Lagarias.
“Inflation is very tame across the board, despite significant easing, so higher oil prices may only create temporary inflation pressures,” he added. 
“Despite possible knee-jerk reactions from bonds and futures markets, we don’t anticipate this issue to change the dovish direction of central banks.
“Bond prices, on the other hand, are at historically high levels and bond traders, who don’t want to be locked in low yields for a long time are looking for an excuse to take profits off the table.”
The Mazars chief economist added:” Fundamentally, this event alone would not usually move fixed income. But at current valuation levels, bond markets are very sensitive and thus fixed income investors should remain vigilant.”
Ian Forrest, investment research analyst at The Share Centre, said that FTSE 100 companies involved in oil production – such as Royal Dutch Shell, BP and John Wood Group – has had been among the winners in early trading.
“While that provides some much-needed cheer for investors in those stocks, it is too soon to draw any firm conclusions,” he said. “Despite the lift for oil stocks the market overall was down, which perhaps reflects concerns that if there is a shortage of oil for any length of time, and the price remains high, it would further weaken an already fragile global economy.”