‘Risk premium’ rises in Middle East after drone attacks

Attacks against oil installations in Saudi Arabia at the weekend place an additional “risk premium” on the Middle East and could lead to increased rates for political risk insurance, according to experts. On 15 September, a number of key oil installations in Saudi Arabia were severely damaged in attacks that shut down more than half of the kingdom’s oil production. The attacks sent shockwaves through international oil markets, causing the price of Brent crude oil to spike 20% on 16 September, although it fell back to 11% later in the day. “It is difficult to overstate the impact of the attacks, given Saudi Arabia’s status as the world’s only real swing producer. Even relatively minor tremors can register strongly in oil markets,” said Torbjorn Soltvedt, principal MENA analyst at Verisk Maplecroft. “The 15 September attacks represent the most serious security incident for Saudi Arabia’s oil industry in decades. The Abqaiq oil facility processes around two thirds of Saudi Arabia’s crude oil – as a result, it represents a vital link in the country’s oil export infrastructure,” added Mr Soltvedt. Details of the attacks are sketchy. Yemen-based Houthi rebels have claimed responsibility but the US and Saudi Arabia blame Iran, alleging that drones and cruise missiles were launched from the country’s southwest. Iran denies involvement but the timing, locations and targets of the attacks explain why it is seen as the most likely culprit, according to Maplecroft. On Wednesday, the Saudi defence ministry said 18 unmanned aerial vehicles (UAVs) and seven cruise missiles had been fired at the facilities in Abqaiq and Khurais. It said data recovered from the UAVs showed they were Iranian, while the sophistication of the weaponry and the direction taken by the projectiles ruled out Yemen as a source. The attacks caused significant damage to Saudi company Aramco’s oil installations in both Abqaiq and Khurais, which include the world’s largest oil-processing plant. Initially, Saudi production was reduced by 5.7 million barrels of crude oil per day, cutting global supply by 5%. According to Reuters, an oil tanker bottleneck has built up at Saudi ports with at least 11 very large crude carriers waiting to load oil cargoes. This is double the usual number. However, the oil price has since stabilised after Saudi Arabia said it would use its vast reserves to restore production levels. On Tuesday, Aramco said it expects to fully restore oil production by the end of the month. “Not a single shipment to an international customer has been or will be missed or cancelled as a result of these attacks,” Saudi Aramco president and CEO Amin Nasser told a press conference. Rupert Morgan, executive director of credit and political risks at insurance broker Gallagher, said the attacks at the weekend are likely to affect political risk insurers’ appetite and pricing. “Aside from the well-publicised impact on Saudi oil production and the anticipated corresponding price hike, recent events in Saudi Arabia will understandably impact both political risk and political violence insurers’ appetite and pricing. I understand that our crisis management team that places political violence cover – essentially terrorism plus war – has seen heightened interest in the product as a direct result of this situation,” he explained. “That said, rather than capitalise on buyer nervousness, the insurance markets are likely to maintain a watching brief – much like the rest of us,” Mr Morgan added. According to Mr Soltvedt, “risk premium” in the Middle East has been steadily building for months, with an ongoing threat of attacks against oil infrastructure in the region. “It is impossible to ignore the context in which the attacks have taken place. During the last two years, we have argued that the Middle East ‘risk premium’ has not been sufficiently priced in, and in July of this year we highlighted the growing risk of attacks against Saudi oil and gas infrastructure,” he said. The Houthis, backed by Iran, have launched numerous successful missile and armed drone attacks against targets inside Saudi Arabia this year, damaging ports, oil fields, pipelines, terminals, airports, desalination plants and a power station. The attacks have highlighted the risk posed by relatively low-cost, low-tech drones and missiles to oil infrastructure and shipping in Gulf states and the Gulf of Oman. Tensions have also been rising due to a string of attacks against tankers in the Persian Gulf, as well as seizures of vessels by Iran. Just this week, Iran seized a tanker in the Gulf. These attacks and seizures demonstrate that Saudi Arabia’s export infrastructure and tanker fleet are in the firing line as tensions between the US and Iran worsen, according to Maplecroft. Tensions between Iran and the US are increasing political risk in the Middle East. Most of the region’s oil producers have benefited from the Trump administration’s “maximum pressure” campaign and economic sanctions against Iran. Donald Trump has ordered further sanctions against Iran in response to the weekend's attacks. Saudi Arabia and the UAE, in particular, are in a good position to replace Iranian barrels taken off the market by US sanctions. However, recent events show there is a downside, namely heightened regional tensions and greater maritime insecurity in the Persian Gulf, Strait of Hormuz and Gulf of Oman, said Maplecroft. Earlier this year, it warned that Iran is likely to respond to US sanctions with covert actions against tankers and oil and gas installations in Gulf states. Correctly “pricing in” this weekend’s attacks will not just be a case of assessing the extent of damage and duration of disruption, said Maplecroft. It will also involve anticipating how Saudi Arabia will respond and weighing up the risk of further attacks, it added. “Over the last few months, [Saudi Arabia] has been remarkably passive in responding to incidents affecting its oil export infrastructure, including tankers and pumping stations. That approach now looks untenable and Saudi Arabia will have to skip several rungs on the escalation ladder,” said Mr Soltvedt. “The risk of escalation is high as Riyadh has consistently held Iran responsible for attacks carried out by regional proxies over the last few years. Although it is too soon to conclude who carried out Sunday’s attack, Iran will undoubtedly stand out as the most likely culprit. The extent of Iranian-backed armed groups in the region, however, means that it will take time for Saudi Arabia to put together measures to mitigate this threat,” he said. However, until Saudi Arabia has identified a clear culprit, its options in the short term are limited, said Maplecroft. The Saudi political leadership will want to avoid a full-blown war with Iran at all cost, noted Mr Soltvedt. But the country’s vast foreign exchange reserves give it significant economic muscle that could be used in the event of a protracted military conflict. “May’s attacks could be brushed off as a shot across the bow. If the intention then was to demonstrate the vulnerability of Saudi energy infrastructure, the attacks against Abqaiq and Khurais were a much less subtle message. This time, it’s not a question of ‘if’ Saudi Arabia will respond but ‘how’ and ‘when’,” said Mr Soltvedt.

‘Risk premium’ rises in Middle East after drone attacks

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