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Oil Market Jumps After Saudi Attacks - Wealth Managers React

Tom Burroughes, Group Editor, September 17, 2019


Investment and wealth management figures comment about the financial and economic fallout from the attacks on Saudi Arabia's massive oil processing facilities at the weekend.

Oil prices eased a touch today after having surged by almost 15 per cent yesterday, with the Brent benchmark rising to more than $69 per barrel, the highest level in 30 years. The rise, caused by two attacks on Saudi Arabian facilities, has hit the world’s most important oil producing region. Some media reports say that Saudi Aramco, the state-run oil firm, faces weeks or months before processing at its giant Abquaiq crude-processing plant is completed. Saudi Arabia’s foreign ministry reportedly said Iranian weapons were used to attack the facilities. The US has blamed Tehran for the attacks.

President Donald Trump, who said he is not going to rush into a new military conflict on behalf of Saudi Arabia, has already pulled the US out of a much-criticized accord with Iran. That pact had been signed by the previous Barack Obama administration to ensure that Iran co-operated in not developing nuclear weapons. At issue was whether Iran could be trusted to comply. Iran’s alleged bid to develop nuclear weapons has been a bone of contention for years. At the same time, Iran is accused by the US and others of being a global sponsor of terrorism, targeting the likes of Israel, for example. This also highlights how Iran, a Shi’ite Muslim country, is often at odds with the Sunni Muslim states of Saudi Arabia and its neighbors in the GCC collection of countries.

Now that the US is a major energy producer, aided by developments such as shale oil extraction, the controversial practice known as “fracking”, the temporary loss of Saudi oil might be less of an issue for Washington than would have been the case when George HW Bush’s administration threw Saddam Hussein’s military forces from Kuwait in 1991. Even so, the loss, even for a few weeks or months, of Saudi Arabian oil processing is a major jolt. In a world fixated by US-China trade tensions and the endless Brexit saga, the Middle Eastern conflict is a reminder of other exogenous shocks that can arise.

Here are some thoughts from wealth managers and the rating agency, Moody’s. Most comments received so far are from Europe and Asia and we will add more from the US as and when they come in. To comment, and provide feedback, email tom.burroughes@wealthbriefing.com or jackie.bennion@clearviewpublishing.com

Yerlan Syzdykov, head of emerging markets, Amundi
It is still very early to quantify the full effect of the supply disruption on global markets, However, the preliminary effect seems to be material and initial hopes of restoring production levels quickly have been put in doubt by the latest (unofficial) communication from Aramco and Saudi officials. It seems that we could only count on a limited restoration within the next few weeks and full restoration could take up to several months.  

The domestic listing [of Aramco] was supposed to happen as early as November and a lot of local investors were the sellers of other stocks in order to make room in anticipation of the upcoming share placement. It is unlikely for the listing to take place as early now, and this could force domestic investors to go back into the stocks they were switching out of for the last few weeks (financial and consumer sectors). The [Aramco bond yield] spread widening on Monday was only 15 bps and is similar to the one for sovereign, reflecting probability of a one-notch downgrade for both based on uncertainty of production restoration timing (and its cost). However, it is unlikely for the rating agencies to follow the market’s assessment. Given Aramco’s and sovereign’s cushion in credit ratings terms, the spread is likely to come back in the short to medium term, provided security concerns subside. The increasing security risk premium does not only apply to Saudi assets but to other GCC countries as well. The most affected country could be UAE (part of a war coalition in Yemen, and, therefore, a potential target for Houthies).
Lionel Kruger, director at JCRA, the financial risk advisory firm
In a sobering display of just how significantly oil prices can react to geopolitical risks, Brent crude prices jumped to more than $71 a barrel in this morning’s opening trade following a series of drone attacks on Saudi Arabia’s crude production facilities over the weekend.
This is the largest single price move since Iraq’s invasion of Kuwait in 1990. The Saudi drone attack shut down approximately 5 per cent of global crude supply and is the single largest outage from one incident. This coincides with heightened tensions between the US and Iran in the Straits of Hormuz. Prices settled quickly as both Saudi Arabia and President Trump moved to allay fears of a protracted supply shortage, but further attacks of this nature will be certain to draw swift price reaction. US Shale production appears to have peaked and investments in conventional oil production are at very low levels since the large market correction in 2014, exposing the world to any protracted large-scale supply disruptions.”
Rupert Thompson, head of research at Kingswood, a UK investment firm
Oil prices have bounced 10-15 per cent on the back of the attack by Iran-backed Hutu rebels on Saudi oil infrastructure which may cut global oil supply by as much as 5 per cent. Even so, the larger impact on markets should be limited unless this heralds a major step-up in background hostilities between Iran and the US/Saudi. Before the attack, all the talk was of looming over-supply of oil and the risk of a major price hike looks limited as US shale output would be stepped up in response. Even after its jump, the Brent oil price at $66/bbl is only back close to the middle of the last year’s trading range.”

Artur Baluszynski, head of research at Henderson Rowe, a UK investment firm
Asian oil-importing countries face yet another possible tax - higher oil prices. Strong dollar combined with higher energy prices could derail the already weakened global economy. The US has access to its own production and can always tap into Canada’s supply, Europe has always been at the mercy of Russia and the Middle East. In the short term, Europe will feel the pain of higher energy prices, but in the long term more expensive fossil fuels will accelerate Europe’s already leading position in renewables like wind and solar.

Rehan Akbar, a vice president at Moody’s, the global rating agency
While the drone attacks on key Saudi Arabian oil facilities is a credit negative and the production disruption is significant, we do not expect this to leave a long-lasting impact on Saudi Aramco’s financial profile given its robust balance sheet and strong liquidity buffers. This event, however, highlights the credit linkages the company has to Saudi Arabia both in terms of geographic concentration and more importantly exposure to geopolitical risk.

Steve Wood. MD, Moody’s
“The attack on Saudi Arabian’s oil facilities highlights the role of geopolitical risk on oil prices, which will likely reflect a risk premium even after Saudi production resumes. Higher oil prices will help producers and hurt refiners in the very near term, but the longer term effect on energy companies will depend on the timing and magnitude of Saudi Aramco’s lower production.

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