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Middle East risk heightened in wake of attacks on Saudi oil facilities

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - On Saturday, drones hit two major oil facilities in Eastern Saudi Arabia, leading to the suspension of 5.7 million barrels per day in oil production - almost 5% of global oil supply and half of total Saudi oil production.

      Yemen's Houthi rebel movement (supported by Iran) has claimed responsibility while the U.S. has blamed Iran and questioned the origin of the drones. Oil prices spiked nearly 20% on Monday, before settling at a 15% gain, their largest one-day climb since January 2009. However, trading activity in Saudi debt remained relatively calm.

      It is likely that the Saudis will use their own oil inventories to partially offset the immediate shock, and restoring production to full capacity is likely a matter of weeks.

      But regardless of Saudi's ability to mitigate the impact of the strikes in the short term, this takes tensions in the region to a new level. Also, the apparent vulnerability of the Saudi oil infrastructure to sophisticated drone and/or cruise missile attacks is likely to boost the risk premium embedded in oil prices. It will also likely boost the risk premium for Saudi debt and complicate the planned IPO for Saudi Aramco.

      Bottom line: Evaluating risk in the Middle East is always difficult, and these attacks underscore the importance of caution and due diligence in emerging-markets investing. The emerging-markets debt team will be closely monitoring the impact of the weekend's events and their aftermath in global markets.