Smoke is seen following a fire at an Aramco factory in Abqaiq, Saudi Arabia, September 14, 2019 in this picture obtained from social media. Image Credit: Reuters

Dubai: The weekend’s attacks Saudi Arabia’s oil facilities are expected to escalate the geopolitical risks impacting oil prices and economic outlook of Saudi Arabia and the region analysts and economists said on Monday.

“We are closely monitoring the situation in Saudi Arabia. The impact on economic outlook of the Kingdom and the oil price outlook depends on how soon the Saudi authorities are able to restore the oil and gas output,” said Zahabia Gupta, Associate Director, Sovereign and International Public Finance Ratings of Standard & Poor’s.

While S&P does not expect an imminent armed conflict between Saudi Arabia and Iran, and a sustained disruption in oil transport through Strait of Hurmuz, the rating agency said the sudden cut in oil supplies due to the recent attacks will have consequences for the economy.

Economists agree. The critical issues for Saudi Arabia and the global oil market are the extent of the damage and the time required to restore Aramco’s oil and gas supply, said Abu Dhabi Commercial Bank’s Economics Team in a note.

“At this point there have been no details on the damage caused, although Saudi Arabia has indicated that it expects output to be restored in the near future with the shutdown of output a precautionary measure. We await further details from Saudi Arabia before making any changes to our macroeconomic forecasts,” said Monica Malik, Chief Economist of ADCB.

While the attack has resulted in a drop of 5.7 million barrels per day (bpd) of oil output, Global oil prices have risen sharply when the markets opened.

“The drop in Saudi supplies could curtail its oil revenues in the short term. But the rise in prices are expected boost the incomes other regional suppliers. Overall we see the geopolitical risks resulting in higher spending on security,” said Gupta.

Growth impact

ADCB economists expect a prolonged disruption in oil and gas supplies will have adverse macroeconomic consequences for the Kingdom. “We estimate that real GDP growth could be lowered by about 1.2-1.4 percentage points under a scenario where it takes one month to fully restore Saudi oil output (assuming a loss of production of 5.7 million bpd for the first two weeks, followed by a smaller loss of 2.5 million bpd in the subsequent two weeks),” said Malik.

This lower growth outlook also takes into account the potential impact on Saudi petrochemical companies, including SABIC, due to curtailment of feedstock supplies. “We currently see real non-oil GDP growth contracting by 0.2 per cent in 2019 (i.e. ahead of the recent events) reflecting a pullback in Saudi oil production to help re-balance the oil market and support the oil price,”

While ADCB economists estimate Saudi Arabia’s fiscal deficit could widen by some 0.9-1.0 per cent of GDP, higher oil revenue would see some support from the higher oil price as production and exports gradually normalise.

“The short-term impact on the economy could be partly mitigated by Saudi Arabia drawing down strategic oil reserves to compensate for the loss of output,” said Thirumalai Nagesh, an economist at ADCB.

As for the global oil markets, analysts said ample global oil inventories and the termination of the output restrictions by the petro-nations such as Kuwait, the UAE or Russia would weather the disruption to a great extent.

“Oil prices likely embed a $5 to 10 per barrel risk premium over the coming weeks. In the most extreme case, the outage lasts weeks to months and includes substantial damage to the large Khurais oil field, the petro-nations would be unable to offset the outage. Asian oil consumers would likely dismiss US sanctions and purchase Iranian oil,” said Norbert Rücker, Head of Economics & Next Generations Research, Julius Baer.

Aramco valuation likely to be impacted

Dubai: The geopolitical tensions and its impact on the safety of the region’s oil infrastructure is expected to impact the valuation of Aramco and other regional oil companies looking for global listing in the context of recent attacks on Aramco infrastructure.

“The developments have significance ahead of the planned part-IPO of Aramco, highlighting the potential vulnerability of its key infrastructure and raising questions over the appropriate level of risk to be factored in the valuation. A meaningful draw down in strategic reserves or delay in restoring Saudi oil production could push back the timing of the Aramco part-IPO, alongside any rise in geopolitical tensions,” said Monica Malik, Chief Economist of ADCB.