Clyde Russell, Reuters

Saudi Arabia’s killing of a journalist and the ramping up of U.S. sanctions against Iran have added a layer of uncertainty to crude oil markets, creating a dilemma as to whether these events are real price drivers or just temporary noise.

The death of Saudi journalist Jamal Khashoggi at the kingdom’s consulate in Istanbul has generated a constant stream of headlines, often with contradictory messages for the outlook for oil supply and prices.

Examples included a veiled Saudi threat to restrict its oil production in response to any sanctions over the killing and a suggestion that U.S. President Donald Trump is soft-pedaling Khashoggi’s death to support his Saudi allies and increase his leverage over them to boost the kingdom’s crude output.

While it is the job of the media to pursue the story and all related angles, the twists and turns of the tale ultimately do little to illuminate the likely path of the crude oil market.

Oil analysts are often reluctant to partake in political discussions, preferring the relative safety of supply and demand fundamentals, trusting that these will eventually overcome what they hope are temporary influences.

But perhaps the better approach would be to stand back and try to dispassionately look at the likely reasonable outcomes of the killing of Khashoggi.

The death, according to the available details, seems either premeditated, state-sanctioned murder or the result of heavy-handed incompetence that resulted in Khashoggi being killed.

Either way, the likely result is condemnation and action by Western countries, and a trial of sorts of the perpetrators, all against the backdrop of trying to avoid placing blame on Saudi Arabia’s Crown Prince Mohammed bin Salman.

What does this mean for the oil market? Most likely very little beyond what is already happening.

The Saudis will continue to try and increase production and meet the demand needs of consuming countries that are being forced to cut back their purchases of Iranian crude.

And while the Khashoggi killing may generate anger at the brazen Saudi cover-up attempt, and raise concerns about the real-world consequences of Trump’s continual characterization of the media as the “enemy of the people,” it’s likely that for oil the outcome will be business as usual.

The likelihood that Saudi Arabia will try to increase its oil output, however, doesn’t answer the question of whether this will be enough to offset the loss of Iranian barrels.

Iran Uncertainty

U.S. sanctions against Iran ratchet up early next month, and the Trump administration’s stated goal is to reduce the Islamic republic’s exports to zero.

Nobody believes this is likely. The issue, though, is how much less oil Iran will supply to the world market, and can this be made up elsewhere.

Tracking Iran’s exports has become more challenging in recent weeks as the country’s oil tankers have taken to switching off their tracking monitors.

It does seem likely that Iran’s exports are around 2 million barrels per day (MMbbl/d), which is about 700,000 to 800,000 bbl/d below potential.

It also seems clear that OPEC, of which Saudi Arabia is the largest producer, has so far been unable to make up for the reduction in Iranian supplies.

Saudi Energy Minister Khalid al-Falih said OPEC and its non-OPEC allies, including Russia, would pump roughly an extra 1 MMbbl/d following an agreement in June to raise supplies to offset any losses caused by sanctions on Iran.

An internal document prepared by OPEC’s Vienna headquarters for a technical panel meeting on Oct. 19 showed, however, that OPEC members, excluding Nigeria, Libya and Congo, pumped only an extra 428,000 bpd in September compared to May.

This suggests the market may well be short of oil, if U.S. sanctions force more buyers to avoid Iranian crude.

Once again, politics is playing a part in this process, with U.S. Treasury Secretary Steven Mnuchin giving seemingly contradictory statements in an interview with Reuters in Jerusalem on Oct. 21.

Mnuchin said it would be harder for buyers to obtain waivers to continue buying Iranian crude than it was under sanctions put in place during the administration of President Barrack Obama.

But he also said the loss of Iranian cargoes was already priced into the market and he didn’t expect oil costs to rise in the wake of next month’s re-imposed sanctions.

If, though, Iranian crude supplies are severely curtailed, it’s likely Mnuchin will discover that the market is currently only priced for the current reduction in Tehran’s oil shipments.

Relying on a boost in oil output from other places, such as U.S. shales, ignores differences in crude qualities and won't necessarily help ease the loss of Iranian medium to heavy sour grades.

Overall, as disturbing as the killing of Khashoggi is, the impact on the oil market will likely be muted, as it isn’t in the interest of anyone to provoke a disruption.

Meanwhile, the impact of renewed U.S. sanctions on Tehran has yet to be quantified, and may come down to a “who blinks first” scenario, as successfully re-imposed restrictions on the trade of Iranian barrels would likely increase prices and cause pain to the United States and its oil-consuming allies.