Asia's fragile recovery path can ill afford oil upheaval, price gyrations

Singapore — Asia may have heaved a sigh of relief that a drone attack in Saudi Arabia left crucial oil infrastructure unscathed, but analysts told S&P Global Platts supply disruptions and high prices stemming from escalating geopolitical risk can choke the feeble economic recovery the region is witnessing after a pandemic-hit year.

With Asia's top oil importers largely dependent on the Middle East for bulk of their crude needs, analysts fear the rebound in oil prices to pre-pandemic levels of over $70 a barrel may squeeze the ability of the countries in the region to find funds needed to undertake economic rebuilding activity.

"If tensions continue to upgrade we believe risks of crude oil disruption will be amplified -- Saudi Arabia's domestic crude stocks have remained at record lows recently -- supporting crude prices to go tentatively higher," said Zhuwei Wang, lead analyst for Middle East oil markets at S&P Global Platts.

Iranian-backed Houthi rebels said March 7 they had launched 14 drones and eight ballistic missiles, which targeted Saudi Aramco's facilities in Ras Tanura and military targets in Damman, Asir and Jazan. A day later, the Saudi Press Agency said that the country had intercepted a missile that was headed for the city of Khamis Mushait.

"We could see further upside in the market in the near-term, particularly as the market probably now needs to be pricing in some sort of risk premium, with these attacks picking up in frequency," ING Economics said in a research note.

Vishrut Rana, Asia-Pacific Economist at S&P Global Ratings said that rising oil prices would push up import bills, putting upward pressure on energy-related components of inflation.

"Some economies are more exposed to higher inflationary pressures. In the region, India and the Philippines stand out where core inflation has been ticking higher," he said.

Implications for Asia

Saudi Arabia was India's second-largest supplier in 2020, but volumes declined almost 11% from 2019 to 35.91 million mt, customs data showed.

In 2020, South Korea imported a total of 978.86 million barrels of crude oil, down 8.7% from 2019. However, the world's fifth biggest petroleum consumer purchased 325.81 million barrels of crude oil from Saudi Arabia last year, 9.7% more than 296.87 million barrels imported from the OPEC kingpin in 2019, according to data from state-run Korea National Oil Corp.

Japan also slashed its overall crude imports in 2020 as local refiners lowered their run rates amid fragile domestic transportation and industrial fuel demand. However, major Middle Eastern crude suppliers including Saudi Arabia, UAE and Kuwait firmly held the top three supplier positions for Asia's third largest petroleum importer, latest data from the Ministry of Economy, Trade and Industry showed.

Japan imported 977,362 b/d of crude oil from Saudi Arabia in 2020, accounting for almost 40% of the country's total refinery feedstock imports of 2.473 million b/d last year, the METI data showed.

China imported and average of 1.7 million b/d of crude oil from Saudi Arabia in 2020, up nearly 2% from 2019 levels of 1.67 million b/d, according to General Administration of Customs data.

The attacks come at a time when oil prices are maintaining an upward trend following the OPEC+ decision week ending March 5 to roll over supply cuts, despite recovering demand. News of the attacks pushed Brent crude May prices above $71/b on March 8. But the market has eased from those levels, with the ICE Brent May contract hovering around $67.15/b in Asian trade March 10.

As Saudi Arabia keeps a lid on supplies, the Asian market is already feeling the pinch. Aramco has beaten market expectations by raising the April official selling price differential for its Arab Super Light crude to $2.35/b, the highest since August 2020, when it was set at $2.65/b against Platts Dubai and DME Oman, Platts data showed.

Similarly, the April OSP differentials for Extra Light, Arab Light and Arab Medium were raised by 60 cents/b, 40 cents/b and 20 cents/b, respectively, against Platts Dubai and DME Oman in March.

Escalation could complicate Iran talks

Wang of Platts Analytics said that escalating Middle East tensions will likely threaten crude supply stability that has already been tightened by the kingdom's extension of 1 million b/d cut through April, and potentially add more uncertainty to the timing of Jizan refinery in ramping up rates.

"Despite the continuing Iran-backed proxy conflicts in Yemen and Iraq, we expect the Biden administration to maintain focus on securing an Iran nuclear deal in line with our timeline -- for a framework deal to restore the Joint Comprehensive Plan of Action in Q2 2021. Yet a potentially successful attack on Saudi oil infrastructure of scale could complicate matters," Wang said.

The Biden administration on Feb. 18 formally offered to restart negotiations with Tehran, inching the two sides closer to a deal that could see the restoration of Iran's approximately 2.6 million b/d export capacity.