February 20, 2024

Saudi Arabia using the ‘oil weapon option’ could cause prices to soar to $150

By Gina Heeb From Business Insider

  • There is increasing evidence Saudi Arabia was behind the disappearance of Jamal Khashoggi, a US resident who has been a critic of the crown prince.  
  • After the US threatened sanctions against Saudi Arabia, the oil-rich country seemed to hint at its ability to hit back through the energy market. 
  • Analysts see a 1973-style embargo as unlikely, but warn oil prices could hit triple-digits if tensions escalate.

Saudi Arabia has pushed back against the overwhelming evidence that it was behind the disappearance of the Washington Post journalist Jamal Khashoggi, emphasizing its “vital role in the global economy.”

And while the oil-rich country isn’t likely to follow through with what many saw as a veiled threat to pressure the energy market if the West imposes sanctions against Riyadh, analysts aren’t ruling that scenario out.

“We believe that Saudi leadership would be extremely reluctant to exercise the oil weapon option, as its reputation as the world’s stable, reliable oil central banker would be severely undercut,” RBC analysts wrote in a research note. “Perhaps more likely is a Saudi decision to slow-walk any Trump inspired output hikes as the Iran energy sanctions deadline looms.”

Saudi Arabia, the largest crude exporter in the world, is set to play an increasingly crucial role in maintaining global supply when US sanctions against Iran take effect next month. Following requests from the Trump administration, Riyadh agreed to increase output by a “measurable” amount earlier this year.

“The Kingdom already looks to be close to reaching the upward limits of what it can easily bring on, and it could now dress up any near-term production constraints as a deliberate policy choice,” the analysts wrote.

While analysts doubt Riyadh would go as far as an energy embargo now, the government has used oil resources to exert political pressure before. During the 19 70s, a Saudi-led coalition slashed oil exports to the US in protest of Washington’s support of Israel in the Yom Kippur War.

“We cannot entirely rule out that the leadership would dust off the 1973 playbook if the bilateral relationship with Washington deteriorates sharply from here,” RBC added.

Saudi Arabia and other OPEC members slashed about a quarter of total oil production that year, sparking an energy crisis across the world. Prices nearly quadrupled, rising to about $12 per barrel in 1974 from $3 per barrel two years earlier. But after failing to achieve major policy goals, the embargo and output cuts were both lifted.

Caroline Bain, chief commodities economist at Capital Economics, agrees Riyadh would be reluctant to go that route this time around. But she said energy costs could nearly double by the end of the year if it did come to that, with Brent already at four-year highs, above $81 a barrel, and output disruptions among key OPEC producers.

“This does not look too improbable given that the Saudi cut would come at a time of declining output in Venezuela and Iran,” Bain said. “The oil price … has already proved its sensitivity to changes in supply this year, rising by nearly 20% since August on fears of a sharp drop in Iran’s production as a result of the re-imposition of US sanctions.”


AP Photo/Anis Belghoul

For more on this story go to: https://markets.businessinsider.com/commodities/news/oil-saudi-arabia-weapon-option-could-cause-price-to-soar-to-150-2018-10-1027622334?utm_source=feedburner&utm_medium=feed&utm_campaign=feed%3a+businessinsider+%28business+insider%29

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