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Oil Market Hit By Saudi Attacks - Wealth Managers React

Tom Burroughes, Group Editor, 18 September 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 yesterday and extended a fall in early trade today after having surged by almost 15 per cent at the start of the week, 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-criticised 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 neighbours 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 the 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.”

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