Saudi Arabia Mixes Oil, Politics After Journalist's Disappearance Strains US Ties

ISHARES Tr/MSCI SAUDI ARABIA E KSA and the United States Oil Fund LP USO dropped Monday after Saudi Arabia threatened the U.S. with “stronger” retaliation if sanctioned for the disappearance of Washington Post columnist and U.S. resident Jamal Khashoggi.

Khashoggi, a journalist critical of the Saudi government, disappeared last week after a visit to the Saudi consulate in Istanbul, and Turkish officials soon accused Saudi agents of murder and dismemberment. As of Monday, local police were said to have audio recordings indicating Khashoggi was killed in the consulate.

Prospective Changes In Oil Policy

Many interpreted the threat as a warning of withheld petroleum access, particularly given a reference to the Saudi’s “influential and vital role in the global economy.”

The Saudi embassy to the U.S. said it was making no changes to its policy of excluding oil from diplomatic negotiations, and the Saudi energy minister pledged stability in the oil market.

"I want to assure markets and petroleum consumers around the world that we want to continue support the growth of the global economy, the prosperity of consumers around the world," minister Al Falih said during a speech.

What An Oil Retaliation Means

Any such counterattack could cripple the oil market. The last time oil was leveraged in politics, a global oil crisis ensued.

“This would be so destabilizing for global markets that it would make the current trade tensions between the U.S. and China look like a game of Axis & Allies,” Stephen Innes, Singapore-based head of Asia Pacific trading at Oanda Corp, told Bloomberg.

Stephen Blank, senior fellow at the American Foreign Policy Council, said other oil producers could step in to fill a Saudi void.

“I think this is something of an empty threat by the Saudis, and I think this is going to end rather badly for them,” Blank said on CNBC.

The resulting decline in oil demand would be a boon for renewable energy and electric vehicle companies including Tesla Inc. TSLA and Nio Inc - ADR NIO.

Are US Sanctions Likely?

President Donald Trump spoke with the Saudi king Monday morning and, while convinced to embrace a different opinion on Turkey, did not cut a deal on sanctions, according to the BBC. Trump will send instead Secretary of State Mike Pompeo to discuss Khashoggi’s disappearance with the king.

Just spoke to the King of Saudi Arabia who denies any knowledge of whatever may have happened “to our Saudi Arabian citizen.” He said that they are working closely with Turkey to find answer. I am immediately sending our Secretary of State to meet with King!
— Donald J. Trump (@realDonaldTrump) October 15, 2018

The Saudi government confirmed an internal investigation Monday.

As the U.S. determines its diplomatic strategy, the American business community will issue its own unofficial sanctions. Mastercard Inc MA CEO Ajay Banga, JPMorgan Chase & Co. JPM CEO Jamie Dimon, Ford Motor Company F Chairman Bill Ford, Viacom, Inc. Class B VIAB CEO Bob Bakish and others have canceled appearances at the Saudi Future Investment Initiative conference next week.