There seems to be a disturbance in the “world oil order”. The long time Saudi Arabian-U.S. oil alliance is under stress at a very critical time just ahead of U.S. sanctions on Iran and right before demand surges ahead of winter and demand to rebuild the South Eastern states hit by Hurricane Michael. President Donald Trump said he would impose a severe punishment on Saudi Arabia if it is proven that Saudi Arabia murdered and dismembered reporter Jamal Khashoggi, who was seen on tape entering the Saudi consulate in Istanbul on Oct. 2. There are rumors that his murder was recorded on his I-watch. The Saudis on the other hand are denying it and are threatening to lash back at the United States if they try to punish them. The Saudis reminded them of their influence on global oil prices and says that the kingdom “plays an impactful and active role in the global economy.”
The story sent oil on a Sunday night surge only to be brought back down by global economic growth concerns. President Trump, in a 60 Minutes interview, is vowing more sanctions on China and it appears that other countries are now also pressuring China to play by the rules. Reuters reported that IMF managing director Christine Lagarde said that the IMF should be “looking at the distortionary effects of state subsidies, improving the enforcement of intellectual property rights, and taking steps to ensure effective competition - to avoid the excesses of market-dominant positions, Lagarde did not mention China, but all those issues are charges frequently leveled by the Trump administration.
Stocks are also feeling the impact from the Brexit. The Guardian is reporting that Brexit talks have hit a significant impasse over the issue of the Northern Ireland border, British government sources have claimed, increasing the likelihood of a deal being achieved only at the last minute, if at all. After the Brexit secretary, Dominic Raab, flew to Brussels on Sunday for talks, it has emerged that a deal is being held up by renewed differences on the so-called backstop arrangement insisted on by the EU to prevent a hard-Irish border. A hard Brexit means a hard border – whatever Owen Paterson says.
However, the suggestion that the EU had surprised Downing Street by insisting that the Northern Ireland-specific backstop would need to stay in the withdrawal agreement has been met with scorn by diplomats in Brussels. According to UK government sources, there is agreement that the EU’s backstop idea, which would keep Northern Ireland in the customs union and single market ahead of a workable trade deal, should apply to the whole of the UK, as insisted on by Theresa May.
However, the sources say, Brussels is arguing this solution has an extra insurance policy of an additional Northern Ireland-only “backstop to the backstop”, which if imposed would place a customs border in the Irish Sea, something May has rejected.
So, for oil the turmoil is turning us in both directions, yet we are an area that should find support. The reality is that as we head to the fourth quarter supplies are going to be the tightest they have been in decades. As we have warned, global spare production capacity is at a historic low, so we can’t afford to lose even a drop of supply. The spat with Saudi Arabia, if it leads to less oil, then we could see a major price spike. While I do not think that is necessarily likely, we should still see oil rebound when refiners come out of maintenance. Hurricane Michael will raise demand and if winter gets an early start we will struggle to keep up with demand. We are in a tight market, very tight.
In fact, in a Saudi OP-ED Turki Aldakhil in Al-Arabia said that if “U.S. 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. An oil barrel may be priced in a different currency, Chinese yuan, perhaps, instead of the dollar. And oil is the most important commodity traded by the dollar today. All of this will throw the Middle East, the entire Muslim world, into the arms of Iran, which will become closer to Riyadh than Washington.