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WoodMac: Geopolitical Risk Premium Is Back In Oil Prices

Riyadh Fort

The attacks on vital oil infrastructure in Saudi Arabia has significant repercussions on the oil market, with the geopolitical risk premium returning in the price of oil, Wood Mackenzie’s VP for refining, chemicals and oil markets Alan Gelder said, commenting on this weekend’s events in the world’s top oil exporter.  

On Saturday, the Abqaiq facility and the Khurais oil field in Saudi Arabia were hit by attacks, which resulted in the temporary suspension of 5.7 million bpd of Saudi Arabia’s crude oil production, or around 5 percent of global daily oil supply.

The Saudis are still assessing how bad the damage is and how long it would take to bring more than half of the Kingdom’s production back online. Aramco is reportedly assuring buyers that they would receive all contracted volumes, although lighter grades would likely be replaced with heavier crude grades.

“This attack has material implications for the oil market, as a loss of 5 million barrels per day of supplies from Saudi Arabia cannot be met for long by existing inventories and the limited spare capacity of the other OPEC+ group members. A geopolitical risk premium will return to the oil price,” WoodMac’s Gelder said.

The countries most affected by a prolonged outage would be Asian buyers China, South Korea, Japan, and India, Vima Jayabalan, Director for short term oil research and trading analytics at WoodMac, said.

Related: Is A Full-Blown War In The Persian Gulf Inevitable?

India could be the most exposed buyer because it has the least amount of reserves, Jayabalan says, noting that China has a strategic petroleum reserve and crude in commercial storage, while Japan and South Korea could use IEA reserves.

In an analysis on the implications of the attacks on the global markets, ING analysts said on Monday that “Again it would seem that Asia is most affected by this supply disruption, effectively compounding the challenges posed by the US-China trade war and the semi-conductor cycle.”

Saudi Arabia has yet to say how long it would take to restore production, but the longer it takes, the higher oil prices could go, ING says.

“A prolonged outage would therefore likely see Brent crude trading well over $70 and perhaps closer to $80 if the outage extended over three to four weeks,” ING analysts Chris Turner, Antoine Bouvet, Francesco Pesole, and Trieu Pham said.

By Tsvetana Paraskova for Oilprice.com

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