Why the market is suddenly concerned Saudi Arabia will weaponize oil in Khashoggi dispute?
In brief: Saudi Arabia could use its dominant role in the oil market to punish foreign governments if the country faces sanctions or other measures.
Oil rose from a one-month low after U.S. President Donald Trump promised “very severe” consequences in the case of a missing critic of Saudi Arabian leaders.
Futures gained 0.7 percent in New York on Friday, trimming its weekly loss to 3.1 percent. Trump’s remarks came as multiple investigations into Jamal Khashoggi’s disappearance dragged on more than two weeks after he entered the Saudi consulate in Istanbul. Ex-U.S. solicitor-general Ted Olson’s law firm said it is no longer lobbying on behalf of the kingdom, and noted oil IHS Markit Ltd. analyst Dan Yergin won’t attend the ‘Davos in the Desert’ event in Saudi Arabia.
Although the Saudis appear unlikely to follow through on threats to use oil as an economic weapon, “they could potentially do something if they wanted to,” said Josh Graves, senior market strategist at RJO Futures in Chicago.
What exactly did Saudi Arabia say to worry the oil market?
In interview excerpts released recently, Trump told the CBS program "60 Minutes" that the kingdom would face "severe punishment" if the allegations against it turn out to be true. This came after U.S. lawmakers raised the prospect of applying sanctions against Saudi individuals meant to punish human rights abuses.
The following morning, the Saudi Press Agency issued a statement saying Riyadh rejects all threats of economic sanctions, political pressure and false accusations, adding that it will respond to any action with "greater action."
What caught the eye of many oil market watchers was a reminder in the statement that "the Kingdom's economy has an influential and vital role in the global economy." Some took that as a veiled threat that Saudi Arabia could withhold supply and let oil prices rise.
A few hours later, the Saudi embassy in Washington, D.C., tweeted a clarification of the statement, saying it appreciated those who are not jumping to conclusions, including the United States.
Why does this matter?
Saudi Arabia produces about 10.5 million barrels of oil per day, equal to more than 10 percent of global crude demand. It exports about 7 million barrels a day of oil, depending on the month.
Given those figures, the kingdom is a central pillar of the global oil market at any time. But its influence is especially pronounced right now.
That's because the Trump administration is aiming to wipe out oil exports from Iran, OPEC's third-biggest partner and a longtime enemy of both Saudi Arabia and the United States. Trump restored sanctions on Iran in May and gave oil buyers until Nov. 4 to stop importing Iranian crude.
Saudi Arabia is one of the few OPEC nations with enough spare capacity to offset the loss of Iranian barrels. The Trump administration is relying on the kingdom to increase output and blunt the upward pressure on oil prices caused by its Iran policy.
Brent crude recently hit a nearly four-year high above $86 a barrel, largely fueled by uncertainty over the impact of the Iran sanctions and concerns about Saudi Arabia's ability to fill the gap.
"The question is will Saudi really use this oil weapon?" Helima Croft, global head of commodity strategy at RBC Capital Markets told CNBC's "Closing Bell" on October the 15th. "That would endanger Saudi's reputation as a stable, reliable supplier to global markets."
Fears are spreading that Saudi Arabia, amid the growing global outcry caused by the disappearance of Saudi journalist Jamal Khashoggi, may hit back at potential economic sanctions by weaponizing its oil dominance.