By Bloomberg
October 15, 2018

Oil rose as traders assessed a threat by Saudi Arabia, the world’s biggest crude exporter, to retaliate against any punishment over the disappearance of a government critic.

Futures climbed as much as 1.9% in New York as traders viewed the Saudi Foreign Ministry statement as a warning that the kingdom could use oil supplies as a political weapon. Yet gains later eased amid doubts that OPEC’s most powerful member would take such an extreme course.

U.S. President Donald Trump has promised “ severe punishment” should Saudi Arabia be linked to the disappearance of journalist Jamal Khashoggi. If the Saudis do use their crude resources to hit back, it would be a break from their decades-old policy of putting petroleum above politics. During a recent diplomatic spat with Canada, state-owned producer Aramco continued to supply a refinery there even though Riyadh severed most other economic links.

“The market will price in some risk premium,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich. “While Saudi Arabia hasn’t used politics in recent years, its crown prince — like President Trump — isn’t an ordinary politician and it’s unclear how he’ll react going forward. But if Saudi crude exports remain unchanged, this risk premium will disappear again.”

Crude has retreated more than 6% after reaching a four-year high earlier this month as a darkening demand outlook, coupled with global stock-market routs, spur investors to shun risky assets including commodities. Still, traders continue to speculate whether the Organization of Petroleum Exporting Countries and its partners can offset potential supply losses from Iran as U.S. sanctions are set to curb oil exports from the Persian Gulf state.

West Texas Intermediate for November delivery rose as much as $1.36 to $72.70 a barrel on the New York Mercantile Exchange, and was at $71.54 as of 10:16 a.m. London time. The contract slid 4% to $71.34 last week. Total volume traded Monday was about 18% above the 100-day average.

Brent for December settlement climbed as much as $1.49, or 1.9%, to $81.92 a barrel on the London-based ICE Futures Europe exchange. Prices declined 4.4% to $80.43 last week, the biggest weekly drop since early April. The global benchmark crude traded at a $9.53 premium to WTI for the same month.

Khashoggi hasn’t been seen since entering the Saudi consulate in Istanbul on Oct. 2. The U.S. administration is said to increasingly regard the kingdom’s denial of any involvement in his disappearance as untenable. Turkish officials say they have audio and video recordings showing a Saudi security team detained the journalist before killing him and dismembering his body, according to the Washington Post.

As OPEC’s top producer, Saudi Arabia has taken on an even more crucial role as the market awaits moves from key producers to make up for lost barrels from Iran to Venezuela. Although the kingdom did use energy as a weapon when it led an oil embargo in 1973-1974, its current threats mark a surprising turn in an otherwise warm relationship with the U.S.

While Trump is reluctant to cancel multimillion-dollar arms sales to Saudi Arabia out of concern its ally will turn to Russia or China instead, a range of other punishments are under discussion within the administration, including downgrading diplomatic relations and sanctioning Saudi officials.

Turki Al Dakhil, who heads the Saudi state-owned Arabiya news network, wrote in an article that U.S. sanctions against Saudi Arabia could wreak havoc on the global economy by taking oil prices beyond $200 a barrel. Faisal bin Farhan, a senior adviser to the Saudi embassy in Washington, said on Twitter that those comments don’t represent the Saudi leadership.

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