Saudi threat may be lifted after Khashoggi killing

Samuel Robinson

The price of crude oil has fallen to a five-week low as Saudi Arabia backed away from using its oil wealth as a diplomatic hammer and record US production showed no signs of significantly slowing.

Saudi Arabian energy minister Khalid Al-Falih eased concern that the world’s biggest oil exporter would withhold supplies to counter any punishment over the killing of regime critic Jamal Khashoggi.

Any disruption to output from the Saudis or other major producers would be buffered by American producers who have been pumping more than 10.5 million barrels a day since April.

Brent crude, the international benchmark, hovered around $80 per barrel in London.

“It looks like both the US and Saudi Arabia would like a way to not have oil be part of any sanctions that result from the Khashoggi murder,” said Michael Hiley, head of over-the-counter energy trading at New York-based LPS Partners.

Crude has fallen from a four-year high touched earlier this month as a darkening demand outlook and equity market routs spurred a flight from risky assets.

While US president Donald Trump praised Saudi Arabia’s official report on Khashoggi’s demise, the oil market remains on edge as many leaders questioned the explanation that he was accidentally killed in an altercation.

Turkish officials have leaked details saying the journalist was murdered.

“The Saudis admitting that Khashoggi died in the consulate may make some nervous about how the West reacts, but Al-Falih saying that they will continue to increase output and won’t use oil as a weapon isn’t as constructive” for oil prices, said Warren Patterson, commodities strategist at ING Bank.

West Texas Intermediate, the benchmark in the US, fell 11c to $69.01 a barrel in New York.

Al-Falih told Tass that Saudi Arabia has no intention of repeating the 1970s oil embargo, in which it and several regional allies squeezed supplies to the US and Europe in retaliation of their support for Israel.

The kingdom will raise output to 11 million barrels a day in the near future and has the ability to reach 12 million if the market requires it, he said.

Meanwhile, American explorers expanded drilling activity for a second week despite a dramatic pullback in the frack work needed to put the finishing touches on new wells.

More than 125 additional rigs have been deployed in US fields this year.

Foreigners were net sellers of four billion riyals (€995m) of stocks last week, more than any other since data was first made available in 2015, with the exception of a one-time outflow from a single transaction in September 2017.

Most of the sales came from qualified foreign institutional investors, which were first authorised to trade directly in the market three years ago.

Local retail investors were also net sellers for the week, while Saudi institutions were net purchasers.

Investors from outside the kingdom and local individuals accelerated sales as volatility surged amid escalating concerns tied to the government’s involvement in the death of Khashoggi after he entered the Saudi consulate in Istanbul earlier this month.

On Sunday, foreign minister Adel al-Jubeir said the killing was carried out by a “rogue operation” that then tried to cover it up.

European leaders and even President Donald Trump have expressed scepticism over the official explanation.

The crisis comes as the kingdom’s market regulator and its stock exchange, known as Tadawul, proceed with reforms aimed at aligning the market with international standards as part of a broader plan to diversify the economy.

Foreigners are still net buyers for the year after they accelerated purchases in the first half, when Ftse Russell and MSCI announced they will upgrade Saudi Arabia to an emerging market starting in 2019.

“The record amount of the selloff really shows the gravity of the situation,” said Naeem Aslam, chief market analyst at Think Markets UK in London.

The Saudis have suffered a major setback, and it is going to take a very long time and hard work for them to gain the same kind of confidence.

The Tadawul All Share Index fellup to 3.3% yesterday, before paring the loss to 0.2% by the close.

Saudi Arabia had the biggest outflow among exchange-traded funds that buy emerging markets last week.

Despite the increased concerns, the main Saudi stock gauge posted a 1.6% increase for the week, prompting traders to speculate that funds tied to the government could be propping up shares, a suggestion that hasn’t been confirmed.

Numbers provided by the stock exchange on Sunday showed that Saudi institutional investors were net buyers of 7.8bn riyals in the week ended October 18, the highest value since June 2017.

Bloomberg

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