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Global Risks Forecast™

US-Saudi tensions warrant oil markets’ attention, but no cause for alarm - yet

US-Saudi tensions warrant oil markets’ attention, but no cause for alarm - yet

Issue

  • Riyadh’s defiant response to growing international pressure over the kingdom’s alleged involvement in the disappearance of Saudi journalist Jamal Khashoggi threatens to spark a diplomatic crisis that could eventually reach oil markets.
  • But the thinly veiled threat to drive up oil prices if the US, UK or France impose sanctions has raised the threshold for anyone considering punitive measures against Saudi Arabia. At the same time, Riyadh’s assertive stance and sensitivity to external criticism increase the risk of escalation should Washington conclude that the Saudi government is responsible for Khashoggi’s disappearance. 

 Implications

  • With Saudi Arabia accounting for more than 10% of global crude oil supply, a serious diplomatic crisis would undoubtedly unsettle markets.
  • Sharp oil production cuts as a Saudi retaliatory measure against international action would nonetheless be far up the escalation ladder; cancelling arms contracts or reducing intelligence sharing represent less dramatic steps that would likely be considered first in the event of a diplomatic crisis. By raising the stakes right from the start, the Saudi authorities are trying to stymie international attempts to punish the country before they get off the ground. 
  • US President Trump’s statement on 15 October suggests that the Saudi strategy is working. By affirming King Salman’s denial of any knowledge of the matter an immediate escalation has been avoided.

Outlook

  • Despite US warnings of sanctions and Saudi threats to retaliate, a scenario where Saudi Arabia uses oil production as a weapon still looks more like a worst-case scenario than a likely outcome.
  • Most importantly, Saudi Arabia’s crucial role in global oil markets will demand caution from all involved parties. Still, Trump’s previous warnings of “severe punishment” if the Saudi government is directly implicated in the killing of Khashoggi leaves little room for de-escalation if further evidence points toward the direct involvement of senior Saudi officials. In this scenario – given the assertive stance assumed by Washington and Riyadh – it will prove difficult keep oil out of the dispute.
  • Irrespective of the outcome of the current diplomatic dispute, Saudi Arabia’s handling of the situation is a reminder that the country is likely to be a greater source of oil market volatility over the coming years than the recent past. Governance – which has traditionally been an exercise in consensus-building among senior royals – is now much more centralised and unpredictable.

Torbjorn Soltvedt, Principal MENA Politics Analyst

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