The 14 September attacks, claimed by the Houthis in Yemen, on Saudi Aramco's largest oil processing facility (Abqaiq, which processes up to 7mbpd of sour crude into sweet crude) and its second-largest oil field (Khurais, which pumps up to 1mbpd) follow a number of others on Aramco and regional oil supply chain assets over the past year. But the context has changed and the sensitivity of asset prices to these attacks may be significantly greater.
A higher profile attack on Saudi amid a more uncertain context
The environment over the past year (and particularly in the past couple of months) has changed in the following ways:
(1) Oil price is well off recent peaks (20% and 30% lower than ytd and last 12-month peaks, respectively);
(2) UAE-Saudi policies on Yemen and Qatar do not appear as tightly aligned (with the UAE changing its strategy in southern Yemen to the potential detriment of Saudi interests in northern Yemen, and the Saudis potentially a little more open to dialogue with Qatar);
(3) US-Iran rhetoric has taken a slightly less abrasive turn (with President Trump's suggestion of no pre-conditions for dialogue, the departure of John Bolton and the apparent desire for a foreign policy win in advance of the 2020 election given difficulties in achieving this in Afghanistan, China, North Korea, or Venezuela. And all this comes amid continuing more overt US Congressional criticism of Saudi post the Khashoggi affair);
(4) Israel's re-run election is imminent (17 September), which may lead to a bout of more aggressive foreign policy by the new government, particularly in the event that the far-right Yisrael Beitenu party acts a coalition kingmaker;
(5) The restart of the Saudi Aramco IPO process (with the appointment of under-writers and the change of leadership of Aramco and the Energy ministry);
(6) Saudi equities are now a part of the mainstream emerging market indices (with a c3% weight in MSCI and FTSE EM) and the share of daily trading and total ownership by foreign (arguably more flighty) investors has grown to c40% and c8%.
The 14 September drone attacks on Saudi Aramco's largest oil processing plant and its second largest oilfield follows a range of attacks on regional oil supply chain infrastructure in recent times: Aramco oil tankers in the Gulf of Aden, third-party oil tankers in the Gulf of Oman (near the UAE port of Fujairah), pumping stations on the Aramco East-West Saudi oil pipeline and the Aramco Shaybah gas processing facility. Some of these attacks have been claimed by the Houthis in Yemen, all attacks have been linked by leaders in the US and the GCC to Iran directly or indirectly, and sometimes these attacks have been labelled "false flag" operations by Iran.
Saudi: oil output resilience more important than military response
Saudi authorities will be keen to demonstrate the oft-mentioned resilience of their oil production, processing and transport infrastructure. The options for a unilateral belligerent military response in Yemen are limited by the same factors which have inhibited the quick win first envisaged when air strikes were launched in 2015: the absence of a critical mass of ground troops, the difficult geographic terrain and the fragmented nature of local armed groups (with generally tactical, rather than ideological alliances). The constraints on a military response on Iran are even more restrictive (as we have argued before): e.g. Iran's conventional military assets are formidable by regional standards, Iran's regional allies and proxies create a credible counter-punch, US (and EU, Turkey and Qatar) appetite for such a conflict is limited, Russia and China would likely support Iran. All of this suggests a path to negotiation is in the interests of Saudi rather than a path to further military conflict.
Houthis: overplaying their hand (like the Taliban recently)
An important question following this attack is whether the Houthis (or, at least, the hardline faction within the Houthis) have over-played their hand and instead of inching towards a potential negotiation (given the divergence within the Saudi and UAE coalition) their successful attack on core Saudi Aramco assets may derail this (similar to the Taliban in Afghanistan which continued its attacks during ongoing negotiations with the US) and motivate oil importers (exposed negatively to higher oil prices) with powerful militaries to join the Saudi effort against the Houthis (e.g. the EU or Pakistan)?
GCC: the top-down investment thesis suffers
Historically, the investment case for GCC oil exporter assets has not suffered as much from periods of regional insecurity as one might expect because the oil price spike that accompanies these periods has provided a hedge of sorts, and because the focus of that insecurity has often been Iran (rather than the GCC itself). The turn of events in the last year is that for first time since the Al-Qaeda compound attacks in Saudi in 2003, the focus of insecurity risk is the most economically sensitive assets in the middle of Saudi. After a year when funds inflows related to index weight changes and inclusion have been such a powerful driver for equity (and bond) performance in the GCC (in the face of anaemic growth and patchy structural reform) the spike in insecurity risk for the bloc's biggest economy may tilt the investment debate towards the bears.