The most likely outcome of the investigations into the disappearance of Saudi Arabian national Jamal Khashoggi will be targeted U.S. sanctions against Saudi Arabian individuals. Likely enough that the Trump administration can argue they are punishing the bad actors, but not so much that Riyadh will be forced to respond. Assuming both sides react in a calm measured fashion, crude oil flows should be unscathed.
The decades-long friendship between the U.S. and Saudi Arabia has come under scrutiny in the aftermath of journalist Jamal Khashoggi disappearing from the Saudi Arabian consulate in Turkey two weeks ago. There is still no official confirmation that Crown Prince Mohammed bin Salman authorized action against Khashoggi and Saudi Arabia maintains that Khashoggi left the consulate safely. However, Turkish authorities believe that Khashoggi was interrogated and killed under direct orders from Riyadh while in the consulate.
Given the fact that Jamal Khashoggi was a U.S. resident, although still a Saudi Arabian national, and the audacity of the accusation that Saudi Arabian government employees murdered a dissident on foreign soil, the potential U.S. reaction has come under severe scrutiny. While U.S. President Donald Trump has said that those responsible will be held accountable, he has also expressed support for Saudi Arabia’s denials and insisted that the world needs to wait on the results of the Turkish and Saudi Arabian investigations into what happened. U.S. Secretary of State Mike Pompeo has been dispatched to the region to meet with leaders on both sides to encourage a cooperative and thorough investigation.
While the investigations are ongoing, business leaders from around the world have begun to distance themselves from Saudi Arabia, and members of U.S. Congress from both parties have called for an independent investigation into the disappearance and for punitive sanctions against Saudi Arabia. Confirmed evidence that the Saudi Arabian government was directly involved, or even a statement from Saudi Arabia that this was an interrogation gone awry would lead to more strident calls for action against the Kingdom.
The White House and Riyadh are now in the very tricky position of balancing actions against economic interests. While Saudi Arabia accounts for only about 10% of U.S. crude oil imports, it is still a global force for oil price stability, a very important factor in light of upcoming sanctions against Iran. On the flip side, Saudi Arabia does not want to drive up the price of oil so high that global growth is diminished or to raise questions about Saudi Arabia’s ability to be a secure long-term source of supply. By basing its international reputation on the idea of stability, Riyadh has taken away its most potent (although destructive) weapon. If Saudi Arabia chooses to restrict production and raise global prices, they will spur further U.S. production growth, and create an opportunity for other producers to step in and “fill the gap.” Additionally, high enough prices will hasten demand destruction. It does not take a very long period of high product prices to impact consumer behavior. Flood the market in an attempt to lower prices, and punish US producers and Saudi Arabia will hurt itself more than the U.S. as shale producers have already proved they can survive and thrive in a low-price environment.
For the time being, all markets can do is wait and see what the reaction from the U.S. will be. If Congress does manage to push through a truly punitive package of sanctions against Riyadh, the likelihood of retaliation rises although Saudi Arabia has no options that allow it to retaliate without harming its own economy in both the short and long term. For now, Stratas Advisors believes that the final outcome will be limited, targeted sanctions against specific Saudi Arabian individuals or businesses. Most likely those identified by the results of the Turkish and Saudi Arabian investigations currently underway. The firm said it will continue to monitor the situation and potential impacts on global crude markets as it develops.
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