Oil is up tonight (WTI ~$0,90 and Brent ~$1.10) following Saudi’s not so veiled threat this morning to potentially use oil as a weapon. We are also writing ahead of the 60 Minutes playing of its full interview with Trump. However, that was recorded yesterday (before today’s Saudi warning) so we don’t expect the interview to have any major shifts in emphasis from the publicly disclosed portion yesterday for potential “severe punishment” if Saudi Arabia is at guilty in the Khashoggi mystery. Unless the US, Canada and others retreat on the Khashoggi mystery, we expect that oil is likely higher with the Saudi threat. Global oil supply is tight with the Iran/Venezuela oil declines and any Saudi retreating of its current 10.7 mmb/d will cause oil to go higher. Perhaps most importantly, we see added risk as today’s Saudi statement seemed to point to a change in the Saudi policy on oil exports. Today, Saudi Arabia includes in others attempt to undermine it threatening sanctions, but also “using political pressures, or repeating false accusations”. This appears to be a broadening of the risk of impacting oil exports from the recent Saudi Press Agency report “that said “Khalid Al-Falih, reaffirmed that the petroleum policy of the Kingdom of Saudi Arabia emphasizes that the Kingdom’s petroleum supplies to countries around the world are not to be impacted by political considerations. He reiterated that this is a firm and longstanding policy that is not influenced by political circumstances”. We believe this broadening of the Saudi position should put more of a risk premium in oil than what is being seen so far tonight, that is unless there is a retreat in criticism of Saudi Arabia. Today’s statement suggests a broadening of what would cause Saudi to cut off oil exports.
Saudi’s not so veiled threat this morning to use oil as a weapon. Early this morning (5:26am MDT), the Saudi Press Agency (the official news agency for Saudi Arabia) posted a story, which is effectively an official warning from Saudi Arabia. The SPA story “General / Official Source: KSA confirms its total rejection of any threats and attempts to undermine it” [LINK] said “The kingdom affirms its total rejection of any threats and attempts to undermine it, whether by threatening to impose economic sanctions, using political pressures, or repeating false accusations that will not undermine the Kingdom and its staunch positions and Arab, Islamic and international status, the outcome of these weak endeavors, like their predecessors, is a demise. The Kingdom as the government and people are steadfast, glorious as ever, no matter whatever the pressures and circumstances might be. The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom’s economy has an influential and vital role in the global economy and that the Kingdom’s economy is affected only by the impact of the global economy.” We don’t believe anyone has any doubt that the Saudi reference to its “influential and vital role in the global economy” refers to anything other than its oil exports.
Saudi also warned that the consequences of a Saudi reaction could send oil to $100 or even $200. A couple hours after the SPA warning, Al Arabiya posted an opinion piece at 7:04am MDT “US sanctions on Riyadh would mean Washington is stabbing itself” [LINK] written by Turki Aldakhil, the General Manager of Al Arabiya News Channel. Wikipedia [LINK] describes the Al Arabiya channel as “According to unconfirmed reports, Al Arabiya was founded through investment by the Middle East Broadcasting Center, as well as other investors from Saudi Arabia, Kuwait, and the Persian Gulf states. Through MBC, Saudi Prince Abdulaziz bin Fahd and his maternal uncle Waleed bin Ibrahim al Ibrahim own and have control over Al Arabiya.” Today’s opinion piece said “If US sanctions are imposed on Saudi Arabia, we will be facing an economic disaster that would rock the entire world. Riyadh is the capital of its oil, and touching this would affect oil production before any other vital commodity. It would lead to Saudi Arabia’s failure to commit to producing 7.5 million barrels. 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 Saudi warning was most likely in response to Trump’s comments yesterday. We are writing before tonight’s airing of 60 Minutes of the Trump interview, which was recorded prior to today’s Saudi threat. But yesterday, CNN [LINK] and others reported on Trump’s comments to air on 60 Minutes tonight. CNN said “On the question of possible sanctions, Trump restated his reluctance to jeopardize a $110 billion arms deal he brokered with Saudi Arabia that was inked on his first foreign trip as President, saying he didn’t want to hurt jobs. But he added, “There are other ways of punishing, to use a word that’s a pretty harsh word, but it’s true.” He said: “There’s a lot at stake. And, maybe especially so because this man was a reporter. There’s something — you’ll be surprised to hear me say that, there’s something really terrible and disgusting about that if that was the case so we’re going to have to see. We’re going to get to the bottom of it and there will be severe punishment.” Trump had been criticized prior to these comments for not taking a stronger stance against the Saudis in this Khashoggi issue.
No word yet on Trump’s potential call with Saudi King Salman. On Friday, Trump told the press that he had not yet talked to Saudi King Salman but he planned to call the King soon to discuss Khashoggi. There has been no confirmation that the call has happened. As of 6pm MDT, there have been no Trump tweets on a call with the King, nor any press reports of any call. We suspect that the early morning SPA story caused at least a reason to be careful about what is said next.
Great timing for Saudi, a tight oil market and no one can replace their barrels. Saudi Arabia is threatening to use oil as a weapon and has the hammer right now given the tight supply market trying to replace Iran and Venezuela lost barrels. US and Europe, in particular, can’t take the risk of Saudi Arabia cutting back oil exports to them as there is no way to replace the size of Saudi oil imports. In 2017, Europe imported 715,000 b/d from Saudi Arabia and this was before having to cut out ~600,000 b/d from Iran, so the Saudi oil imports are likely even higher now. The US imports from Saudi Arabia have ranged from 857,000 to 1.237 million b/d over the past two months and this cannot be replaced. In 2017, Canada imported ~100,000 b/d from Saudi Arabia, and theoretically, at that level, could possibly replace the oil due to the size. B
Clearly the US and Canada are well aware of the oil supply problem with their positions to date on Saudi Arabia regarding Khashoggi. Both the US and Canada have been quick to confirm that they do not plan to impact arms sales to Saudi Arabia. Trump has been well reported to note that he doesn’t plan to impact US arms sales to Saudi Arabia. He has been widely quoted ““In terms of the order of $110 billion — think of that, $110 billion — all they’re going to do is give it to other countries and I think that would be very foolish of our country”. Trudeau also has expressly, so far, said it will not impact Canada’s $13 billion in arm sales to Saudi Arabia. Reuters [LINK] reported “Trudeau also reiterated that Ottawa would not scrap a 2014 contract that the Canadian unit of U.S. weapons maker General Dynamics Corp won to supply Saudi Arabia with light-armored vehicles. The deal is worth up to $13 billion.”
The easy trigger will be if US, Europe and Canada move away from political criticism to “real” actions. The Trump comments on the potential for severe punishment seemed to be a US warning on a potential shift away from criticism to “real” action. And this morning’s cable news shows noted comments from even Republican senators on the need to take “real” action if the Saudi’s are proven or deemed to be proven guilty. We believe the easy trigger will the US and others take “real” actions or stick to political criticism because any escalation to “real” action would seem to elevate the issue for Saudi Arabia. There is also the wildcard in the US of the Nov 6 mid term elections and how that will make it more difficult for Trump to retreat.
The major question today is Saudi Arabia broadening what would cause it to cut oil exports away from its previously stated policy that Saudi oil exports are not impacted by political considerations. The easy trigger is if there is “real” action (ie. sanctions) taken against Saudi Arabia. But it looks like Saudi Arabia is warning that they are prepared to take actions for less than “real” actions ie. are they broadening the list of items that would lead them to cut oil exports? The SPA story is very interesting as it seems to point to a change in Saudi policy on using oil as a weapon. This morning’s story said ““The kingdom affirms its total rejection of any threats and attempts to undermine it, whether by threatening to impose economic sanctions, using political pressures, or repeating false accusations that will not undermine the Kingdom”. Its not just sanctions, it using political pressures or repeating false accusations. This is very different than the previously publicly stated policy. In early Aug, the Canada/Saudi Arabia turned sour following Canada’s Foreign Affairs Minister Freeland’s Aug 2 tweet “Very alarmed to learn that Samar Badawi, Raif Badawi’s sister, has been imprisoned in Saudi Arabia. Canada stands together with the Badawi family in this difficult time, and we continue to strongly call for the release of both Raif and Samar Badawi”. One of the questions that came up in this worsening relationship was Saudi oil exports to Canada. Our Aug 12, 2018 Energy Tidbits [LINK] highlighted the Saudi Press Agency report [LINK] that said “Khalid Al-Falih, reaffirmed that the petroleum policy of the Kingdom of Saudi Arabia emphasizes that the Kingdom’s petroleum supplies to countries around the world are not to be impacted by political considerations. He reiterated that this is a firm and longstanding policy that is not influenced by political circumstances”.