A Saudi Ultimatum?

A Saudi Ultimatum?

by | published October 24th, 2018

An increasingly desperate Saudi attempt to disassociate the murder of Jamal Khashoggi from Crown Prince Mohammad bin Salman (MBS) has been unraveling.

And inevitably, because Saudi Arabia is so interwoven with oil, an acceleration may build on crude oil prices.

The situation currently looks like this.

In the latest version of events, Jamal Khashoggi’s death resulted from a fight that supposedly occurred in the Saudi Istanbul consulate.

But even Donald Trump, the number one U.S.-Saudi supporter, is expressing disbelief in this latest explanation from Riyadh.

And indeed, some embarrassing elements have emerged in the storyline.

First, the use of a Khashoggi lookalike wearing the slain journalist’s clothes to support the claim he left the building alive was quickly shot down by Turkish intelligence. The guy was wearing different shoes, followed to a hotel, and promptly identified.

Second, among the 15 Saudi personnel flown into the country to meet Khashoggi was a forensic pathologist, security close to the crown prince, two high level intelligence officers… and a bone cutter.

Seems it was going to be one hell of a knife fight.

Third, even accepting the contention that these were “rogue elements,” they remain main line Saudi operatives from within MBS’s circle.

And fourth?

Nothing happens at this level without the express permission of MBS.

And there’s several results of this situation we’re going to see moving forward…

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Trump has been confronting a wave of congressional criticism of the Saudis, much of which is from his own party.

Some have already called for sanctions, pressure for Saudi King Salman to remove MBS from the line of succession, and even cancellation of a huge contract for Saudi military purchases from the U.S.

Trump has repeatedly mentioned this military contract.

While consistently putting and maintaining the figure at $110 billion will cost American jobs if it is canceled, no more than $14 billion has yet been formally agreed to. In any event, it appears to put a dollar sign where it doesn’t belong in a discussion about accountability.

The White House is being pushed into a corner, and both sides of the aisle know it.

There will need to be some sort of action taken by Washington, and the degree of that sanction will determine what Riyadh does in response.

The argument that MBS should be removed is only for U.S. domestic political consumption; Saudi Arabia simply does not respond to such ultimata. It knows it has two realities going for it:

First, it knows it has served as a U.S. surrogate against Iran in Yemen and Bahrain, along with providing a buffer for American interests elsewhere in the Persian Gulf.

And second, getting back to the focus of today’s Oil and Energy Investor, there is the reality of crude oil…

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My sources have made it very clear that strong sanctions from the U.S. against MBS are likely to result in the Saudis reducing aggregate exports in response.

In other words, Riyadh is in the driver’s seat here.

Just yesterday, the Saudis pledged to increase production to offset any loses after imposition of U.S. sanctions against Iran. Trump had been lobbying for that a month ago.

Global exports have been hard pressed to counter accelerating declines from Venezuela, Libya, and Nigeria. That had been one of the catalysts for the spike in oil prices, until recently.

For Trump, the calculation is politically direct. Rising oil prices due to supply constraints results in higher prices for refined oil products – and in the U.S., gasoline votes.

However, the pledge by Saudi Arabia to raise production is not enough. Recall figures I have provided previously in Oil & Energy Investor.

By the time Iranian sanctions kick in (as seen in delivery schedules for the end of the year), Venezuela, Libya, Nigeria, and Iran together will contribute a decline in exports of about 3.3 million barrels a day.

There is about 2.8 million barrels a day of reliable additional exports in all of OPEC, and over 60% of that is Saudi.

Meanwhile, Russia cannot increase exports sustainably much more than present totals. And while the U.S. has plenty of excess production capacity, the ability to increase exports beyond more than 3 million barrels daily is limited by overall port and terminal capacity.

Therefore, the Saudis can bothincrease exports and profit from a rise in prices.

That puts the response to any sanction against MBS emanating from Washington as a win-win for Riyadh.

By reducing exports in response, the Saudis can increase revenues while serving as the lynchpin for a larger OPEC-Russian policy. That this happens while other source nations experience continuing declines of their own merely accentuates the objective.

Of course, this will serve to raise domestic gasoline and related prices in the U.S.

One of my contacts put it this way: “It will provide a perfect parry to an American sanction.”

Unfortunately, somewhere in all of this we risk losing sight of a death in Istanbul and the culpability for what took place there.



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  1. Larry Horowitz
    October 24th, 2018 at 23:04 | #1

    The US has much more to fear from Saudi Arabia than just a reduction in their oil exports. Under an agreement dating back to 1974, the US provides protection for the Saudi regime in exchange for the regime invoicing all their oil sales in US dollars (the “petrodollar”). The petrodollar agreement causes nations worldwide to trade primarily in dollars and to have 60% of their reserve currencies in dollars, as well as $3T of US Treasury bonds. If the US displeases the Saudis and they begin invoicing oil in other currencies, central banks worldwide would be selling much of their US dollars and Treasuries, causing the dollar to drop and interest rates here to rise. Thus, the Trump administration will be very tame in any sanctioning of the Saudis.

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