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Saudi Arabia could hike oil prices over the Khashoggi case and why it could backfire


The kingdom of Saudi Arabia has been in the headlines for all the wrong reasons lately, and the pressure is mounting after the arrival of U.S. Secretary of State Mike Pompeo Tuesday morning.

Relations between the two countries have been strained to say the least over the past couple of weeks, as Saudi look to make a deal with Russia over sustaining oil prices. 

In relation to the recent events of the alleged killing of journalist Jamal Khashoggi, speaking to journalists on Monday evening, Mr Trump offered a possible explanation to counter Turkish officials' assertion that a team of 15 Saudi operatives arrived at their consulate in Istanbul on Oct. 2 and killed and dismembered the Saudi writer. It could have been "rogue killers," Mr Trump suggested.

According to reports from CBS news the Saudi government was planning to admit he was killed, but call it an accident.


Saudi Arabia' oil minister and chairman of Saudi Aramco Khalid A. Al-Falih arrives as Crown Prince Mohammad bin Salman meets Britain's Prime Minister Theresa May in Downing Street in London, March 7, 2018.

The officials told CBS News reporter Kylie Atwood that the Saudi government was expected to claim a mission that was approved by King Salman's son, Crown Prince Mohammed bin Salman (often referred to as MBS), to interrogate Khashoggi, but not kill him. They will say, according to Atwood's sources, that the journalist died as the result of an interrogation by Saudi operatives that went wrong.

After the meeting, Pompeo's staff in Washington released officials readouts saying he had, "thanked the King for Saudi Arabia's strong partnership with the United States," and for "his commitment to supporting a thorough, transparent, and timely investigation of Jamal Khashoggi's disappearance."

The Saudis are the biggest buyers of U.S. military hardware in the world. Mr Trump has made it clear he's reluctant to cancel a planned arms sale to the kingdom worth $110 billion, but he vowed "severe punishment" if the Saudi regime is found to bear culpability for Khashoggi's presumed killing.

There are now fears that The Saudis will hike oil prices in retaliation to the global outcry on the killing.

In an article by CNBC today it printed Saudi Arabia's not-so-veiled threat issued in a government statement Sunday emphasized its "vital role in the global economy" and that any action taken upon it will be met with "greater action,

If this is something the Saudis were allowed to do, they'd be really shooting themselves in the foot," Warren Patterson, commodities analyst at ING, told CNBC's Squawk Box Europe on Tuesday. "In the short to medium term we'll definitely see an incremental amount of demand destruction, but the bigger issue is in the longer term."

Any action in withholding oil from the market, he said, "would only quicken the pace of energy transition."

An incendiary op-ed published in Saudi news outlet Al Arabiya on Sunday threatened "economic disaster" if countries came down on Saudi Arabia over the Khashoggi case. "If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure," the outlet's general manager Turki Aldakhil wrote.

The Saudis are OPECS largest producer accounting for as much as 10 per cent of the world's crude. 

"Riyadh would be hesitant to go down this route. While there would probably be a significant near-term boost to the Kingdom's oil income, pushing oil prices higher would only serve to rile President Trump," London-based research consultancy Capital Economics wrote in a client note Monday. "The Saudis are determined to remain close with Washington to preserve its 'anti-Iran' axis."

"In addition," Capital Economics wrote, "higher oil prices would simply encourage other producers to raise output and grab market share from Saudi Arabia."

"If the Saudis were to withhold supply from the market, the price oil could easily hit $200 (per barrel)," warned John Kilduff, founding partner at commodities investment firm Again Capital. "How high prices go would depend on the amount withheld. The Saudis have avoided using oil as a weapon, but, depending on how cornered Mohammed Bin Salman feels, anything is possible."
"I sense that this episode will be his Waterloo, which will only add to the rising security premium in oil prices."

As the market tightens with the loss of other major exporters, the stakes are only moving higher, he added. "A material loss of supply from Saudi Arabia could not be replaced."

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