U.S. Secretary of State Mike Pompeo arrived in Riyadh Tuesday to meet with the royal family and discuss the disappearance of Jamal Khashoggi. Photo by U.S. Department of State/UPI |
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Oct. 16 (UPI) -- The disappearance of journalist Jamal Khashoggi has created a diplomatic crisis for the United States and Saudi Arabia, which typically means crude oil prices will go up.
On Oct. 2, Khashoggi went into the Saudi consulate in Turkey but never walked out, sparking fears that he was murdered for his negative views of the royal family. Relations between the United States and Saudi Arabia deteriorated with Trump promising "severe punishment" for whoever murdered Khashoggi and Saudi leaders promising sky-high crude prices.
But analysts disagree on where oil prices would go if this drags on.
While U.S. Secretary of State Mike Pompeo met with the Saudi royal family to discuss the missing Washington Post columnist, crude oil prices remain stable with WTI trading at $71 and Brent at $80, both up pennies over Monday.
"My guess is the quid quo pro is likely going to be that the Saudis end up pumping aggressively as they can," Michael Harris, founder of Cribstone Strategic Macro, said on CNBC Tuesday. "And so, all things being equal, I think this is probably negative for the oil price. The Saudi guilt is going to play into the oil price."
Saudi Arabia produces 10.5 million barrels of oil per day, 10 percent of global demand and it exports 7 million barrels a day.
Sanam Vakil, a senior consultant with Chatham House, said there are concerns about Saudi Arabia using its oil dominance as a weapon.
"They didn't anticipate that the international community would care so much about a journalist and I think that is where the Trump administration hasn't really delineated red lines in their relationship," Vakil said.
There's still no update on what happened to Khashoggi and it could take a while for diplomatic relations to return to normal.
Sen. Lindsey Graham, R-South Carolina, said he blames the crown prince Mohammed bin Salman for the murder and said he would stop doing business with the country as long as he's in power.
"I'm going sanction the hell out of Saudi Arabia. I feel personally offended. They have nothing but contempt for us," Graham said on Fox and Friends Tuesday. "He is toxic. There is no way we can move forward. I would suspend arms sales as long as he's in charge."
Graham added that Khashoggi's three children came to his office.
The Saudis have promised "greater action" if sanctions are issued against them. But that tough stance could backfire.
"If this is something the Saudis were allowed to do, they'd be really shooting themselves in the foot," Warren Patterson, commodities analyst at ING, told CNBC's Squawk Box Europe on Tuesday. "In the short to medium term we'll definitely see an incremental amount of demand destruction, but the bigger issue is in the longer term."
Patterson added that withholding oil from the market to force the price up would only speed up the world's transition to alternative forms of energy.
