US, Saudi tension over Khashoggi disappearance makes oil market nervous

EPA-EFE/ERDEM SAHIN

Journalists work in front of the residence of the Saudi consul in Istanbul, Turkey, October 17, 2018.

Oil producer America is now able to sustain high oil prices, toughening its stance against Saudi, Iran.


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The disappearance of a prominent Saudi journalist has created major volatility around the oil market. Relations between the House of Saud and some parts of the international community, including the US, have deteriorated rapidly after Jamal Khashoggi, a journalist who resided in the US, disappeared earlier in October after entering the Saudi consulate in Istanbul.

The incident of the journalist’s disappearance and diplomatic escalation opens a new source of risk for oil prices. “We’re going to be seeing more volatility around this because it depends on what the Saudis reaction is going to be,” Justin Urquhart Stewart, director at Seven Investment Management in London, told New Europe by phone on October 15. “I wouldn’t be at all surprised if you see some significant spikes in the price but not based on demand, it will be based on political reaction,” he added. He noted, however, that it is unlikely that Saudi Arabia will retaliate by constricting oil supply.

Riyadh has said it will conduct an investigation into the disappearance. Turkey’s President Recep Tayyip Erdoğan met with US Secretary of State Mike Pompeo in Ankara on Wednesday and discussed the case of Khashoggi’s disappearance, Turkish media reported.

US President Donald J. Trump reportedly said Saudi Arabia’s crown prince denied knowledge of what happened to Khashoggi in a phone call.

However, Urquhart Stewart told New Europe that the US is in a position to demand answers from Saudi Arabia and toughen its stance against Riyadh if the diplomatic row escalates.

“Compared to five years ago, America, now, is much more able to sustain a higher price because of all the fracking that is going on and the capacity they have got. They are no longer dependent so much on Venezuela or Saudi so it gives more strength to Trump’s actions because of the lack dependence on Saudi that would have been there a few years ago,” Urquhart Stewart said.

He noted that the mixture of old allies and relationships has changed rapidly.

Looming US sanctions on Iran have also fuelled oil prices. “Iran will do what it possibly can to try and keep this deal going because they need to able to get more trade coming through with the political instability. Again Trump has been lucky. He found Iran in a very weak position where five years ago his threatening statements would have been met with a much more aggressive reaction,” said Urquhart Stewart.

“This time his threatening statements are taken more seriously because the Iranian government doesn’t have the popular support behind it and may well find itself in more severe financial difficulties,” Urquhart Stewart said. “Trump has been very lucky to find himself in a position where America can threaten things and not be so dependent on the oil price as they were say five years ago,” he added.

Nevertheless, on October 17, oil prices steadied after three days of gains. Brent crude was down 10 cents at $81.31 a barrel by 0945 GMT, after gaining $1.15 in the previous three sessions, Reuters reported. The global benchmark, which hit a two-week low last week as equity markets dropped, is trading around $5 below a four-year high of $86.74 reached on October 3. US light crude oil CLc1 was down 20 cents at $72.02.

Urquhart Stewart said the more that there’s a political fallout from the US and Saudi Arabia’s reactions, this could lead to a short-term spike in oil prices. “But I don’t think we will because Trump likes to maintain his friendship with Crown Prince Mohammed bin Salman so they will come up with some fudge on who killed the journalist so I can’t see why the price necessarily needs to go that much higher at the moment. But if there is further strengthening of the tension between Saudi and America that could push the price up,” he said.

 

 

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