Explainer: How Singapore is affected when Saudi oilfields burn

By NG JUN SEN

17 September, 2019

SINGAPORE — Singapore motorists at petrol pumps over the weekend might not have noticed any price difference, but a significant shift could be on the cards. This is after drone attacks crippled Saudi Arabia oil facilities on Saturday (Sept 14), causing the price of crude oil to surge overnight.

In what was the largest intraday spike in 20 years, Brent crude futures, the global oil benchmark, rose nearly 19.5 per cent at one point and US futures leaped by 15 per cent on Monday (Sept 16).

On the other hand, petrol prices hardly moved over the weekend, as it typically takes months before global shocks are reflected in refined products such as petroleum.

However, this looks to be the biggest supply shock in history, what with more than 5.7 million barrels a day, or 5 per cent of global supply, temporarily affected by the attacks — exceeding past oil embargoes as well as the Iranian Revolution, which lasted from 1978 to 1979.

[And countries have announced that they are releasing their strategic oil reserves to adjust for the shortfall - and take advantage of the price increase? It will smoothen out.]

For Singapore, which imports around S$15 billion more oil than it exports, the impact will likely be felt both positively and negatively by businesses, consumers and the overall economy, with much depending on the increasingly volatile outlook of the Middle East, experts tell TODAY.

WHAT IS HAPPENING IN THE MIDDLE EAST?

The attacks occurred amid an ongoing US sanction of Iran, which is already affecting the stability of global oil prices given its large spare capacity of crude oil.

On Saturday morning, drones struck the Saudi Aramco’s state-run Abqaiq and Khurais oil facilities. Abqaiq is regarded as a key installation in Saudi's oil industry, while Khurais is the second-biggest oil field in the kingdom.

While drones as well as ballistic missiles have been used in such roles in the past, the latest attack appeared to be more precise and larger-scaled. Yemen’s Houthi rebels, who have claimed responsibility, said that 10 drones were used.

Mr Mike Pompeo, the United States Secretary of State, later said in a tweet that the attacks originated from Iran, calling it “an unprecedented attack on the world’s energy supply”.

Other US officials pointed to Iran-backed militias in Iraq. Both Iran and Iraq have denied the allegations.

WHAT IS THE IMMEDIATE AFTERMATH?

In response to the attacks, the US approved the use of its emergency stockpile of crude oil. Some members of the Organization of the Petroleum Exporting Countries (Opec) also stated to the media that they have enough spare capacity or are ready to raise their output to deal with supply disruptions.

These moves helped reassure the markets somewhat, though oil prices were still far higher than the pre-attack levels. Oil prices also continued to trampoline by around 1.5 percentage points throughout Monday.

The weekend attacks slashed oil production in Saudi Arabia by nearly half. The country is the world’s third largest crude oil exporter after the US and Russia.

With capacity falling by 5.7 million barrels a day (bpd), the latest incident marks the most serious disruption to oil supply to date, surpassing the 5.5 million bpd shock in the Iranian Revolution, and disruptions recorded in the 1973 Arab-Israeli war, the 1990 Iraqi invasion of Kuwait and the Iran-Iraq war in 1980.

Mr Jeffrey Halley, Asia-Pacific senior market analyst with foreign-exchange firm Oanda, told TODAY that the attack effectively removed Saudi Arabia’s “swing capacity” — or its ability to ramp up or down oil output by millions of barrels a day in response to global events, in order to keep oil prices stable.

“Only Iran has any meaningful capacity in the near term and that is hampered by US sanctions,” he said.

“It will only really become significant if the Abqaiq complex is off-line for a long period of time. Saudi Arabia has 188 million barrels of oil in storage around the world to cover situations just like this.”

While Saudi Arabia has said that it will take at least two days to restore the supply, declassified US satellite images showed that it could take months to reverse the damage.

ARE THERE HEIGHTENED GEOPOLITICAL RISKS?

Beyond the existing damage, the attacks could also affect confidence in Saudi Arabia’s ability to guard its sensitive infrastructure, experts said.

Ms Ho Pei Hwa, an equity analyst at DBS bank, told TODAY that whether Saturday’s outages are short-lived or not, a bigger concern is the now-heightened geopolitical risk in the Persian Gulf and the possibility of another attack on infrastructure.

“If it is possible to launch such attacks on Saudi Arabia’s crucial oil infrastructure, it shows that there is a vulnerability,” she said.

These are “serious worries”, Mr Halley also said, adding that there could now be a “built-in risk premium to oil” due to the fraught geopolitical situation in the Middle East.

In a report, S&P Global Platts Analytics said that the sudden change in geopolitical risk not only eliminated the bearish outlook of a discount of US$5 (S$6.90) to US$10 (S$13.80) a barrel, it potentially adds a premium of US$5 to US$10 a barrel “to account for the now undeniably high Middle Eastern dangers to supply and the sudden elimination of spare capacity”.

It noted that the attacks marked a severe escalation following a number of strikes on key oil infrastructure and transit routes in the Middle East this year. This includes temporary halts through Saudi Arabia's main oil transport pipeline to terminals and refineries on the Red Sea, as well as attacks on oil tankers in the Strait of Hormuz.

WHAT ARE THE PAINS AND GAINS FOR SINGAPORE?

Mr Peter Kiernan, lead analyst for energy issues at Economist Intelligence Unit, a global business research group, said that significant oil importers, including China, India, Japan and South Korea, will be vulnerable due to their high level of reliance on crude oil supplies from the Middle East.

“Asian oil-buying economies also face the fallout, in terms of further risk of lost supply, from any escalation of tensions between Tehran and Washington as a result of the attack on Saudi oil facilities,” he said.

One major impact could be inflation and living costs. A report from DBS Group Research noted that every 10 per cent increase in oil prices will likely add about 0.3 percentage points to headline inflation, though it also said that this increase to cost of living could be partially negated by the introduction of the Open Electricity Market scheme in Singapore since last year.

But while Singapore is a significant oil-buying economy with net oil imports of S$15.4 billion, it is also a petrochemical hub, DBS Group Research noted.

Its oil-and-gas sector accounts for 5 to 6 per cent of the country’s economy. This sector, which includes supporting services such as finance or oilfield services businesses for the oil-and-gas industry, is expected to benefit from oil price hikes, the report said.

Ms Ho from DBS, together with her colleagues Suvro Sarkar and Jason Sum, noted that a rebound in oil-and-gas-related stocks “has legs”. This includes oilfield service providers and shipyard stocks — Sembcorp Marine stocks closed at S$1.30 per share on Monday, around 2.4 per cent higher than the previous day.

Oil prices had previously fallen by nearly 70 per cent from 2014 to 2016, which had claimed casualties here such as oilfield services firm Swiber Holdings then. Conversely, a price hike might aid Singapore’s oil-and-gas sector and could benefit the economy overall.

“Singapore has one of the highest current account positions in the region and the impact (to the economy) will also be offset by increases in refined petroleum exports,” DBS Group Research said.

However, this hinges on whether the hikes to oil prices are sustained or short-lived, the analysts said.

A sustained increase in oil prices could ultimately hurt the petrochemical industry here by reducing demand for downstream refined products and therefore affect growth negatively, Mr Halley said.

Non-oil sectors — shipping, land-based transport and airlines — will become the “obvious” initial casualties of a sharp rise in oil prices, he said, adding that motorists will feel the impact as well when the hikes are priced into the production of petroleum.

“Expect those fuel charges on your airline tickets to start rising sooner rather than later, depending on the chosen airlines' hedging policy,” Mr Halley said.