A more nuanced look into the impact of the Strait of Hormuz’s closure on the GCC

The war between the US/Israel and Iran has fundamentally shifted the economic calculus for the GCC. While the headlines scream “oil shock,” the reality on the ground is a decoupling of price benefits from volume risks for some GCC countries, resulting in different scenarios across regional economies, according to a Goldman Sachs report seen by EnterpriseAM.

How is that possible? For countries capable of rerouting their oil exports, oil prices — which have surged beyond USD 100 / bbl — are going to offset the downside from lower export volumes, Goldman Sachs explains. Even blockaded countries are seeing better-than-expected budget balances because the price of the oil they can get out is so high. However, Goldman Sachs cautions that this scenario does not factor in expenditure forecasts, as they “may increase due to an adoption of anti-cyclical policy and/or increased spending on defense.”

The diverters: Saudi Arabia, the UAE, and Oman are the most insulated. Saudi Arabia is successfully diverting 3 mn bbl / d — about two-thirds of its Strait of Hormuz exports — via Red Sea pipelines, meaning a mere 1% drop in exports. The UAE is rerouting approximately 1 mn bbl / d, resulting in a negligible 2% drop in oil exports, while Oman’s loading facilities sit safely outside the Strait, Goldman Sachs notes.

Yes, but: This is based on an assumption of just a one-week-long disruption in shipping through the Strait of Hormuz, before a gradual return to full capacity.

IN CONTEXT- The Strait of Hormuz typically accounts for around 25% of global seaborne oil trade and some 20% of global LNG trade, according to a recent research note from Deutsche Bank seen by EnterpriseAM. However, oil flows through the chokepoint have now collapsed to just 10-15% of their normal volume, according to Goldman Sachs.

The blockaded: Kuwait, Bahrain, and Qatar have zero capacity to divert shipments. The report shows that Kuwait and Bahrain are now expected to see their economies contract this year, with oil exports falling by 5%.

Global exposure: Despite the EU and China being the world’s biggest energy importers, the impact of oil price volatility is potentially limited due to their declining dependence on fossil fuels, according to Deutsche Bank. Crucially, the EU’s energy import markets are diversified, resulting in a diminished reliance on Middle Eastern energy supplies.

The outlook: Future forecasts depend entirely on how long the Strait of Hormuz remains closed. Under the base case scenario of a “short-lived” disruption where volumes recover over 28 days, global growth would shrink by 0.1 percentage points, according to another Goldman Sachs report seen by EnterpriseAM. However, if the closure persists and oil stays above USD 100 / bbl, global growth would be dragged down by 0.4 percentage points, the report warns.

MARKETS THIS MORNING-

Asia-Pacific markets are down sharply in early trading this morning, with South Korea’s Kospi down 7.8% and Japan’s Nikkei down 7.0%, after oil jumped above USD 100 / bbl for the first time in years. Over on Wall Street, it is shaping up to be a turbulent start to the week with futures in the red.

THE CLOSING BELL-

The DFM fell 3.2% on Friday on turnover of AED 1.2 bn. The index is down 3.2% YTD.

In the green: Agility The Public Warehousing Company (+14.6%), Al Salam Sudan (+6.4%), and Takaful Emarat (+5.0%).

In the red: Dubai Electricity & Water Authority (-5.0%), Commercial Bank of Dubai (-5.0%), and Chimera S&P UAE UCITS ETF - Share Class A - Accumulating (-4.9%).

Over on the ADX, the index fell 1.4% on turnover of AED 1.5 bn. Meanwhile, Nasdaq Dubai was down 3%.