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What Mohammed bin Salman’s Comments Mean for Oil

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On September 29, in an interview with CBS News, Mohammed bin Salman said of the September 14 drone attack on Saudia Arabia, “This attack didn’t hit the heart of the Saudi energy industry, but rather the heart of the global energy industry.” The attack led to a shortfall of 5.5% in the global oil supply.

Mohammed bin Salman is Saudi Arabia’s crown prince and heir to the throne after his father, King Salman bin Abdulaziz Al Saud. He said that the global community should resolve the Iranian crisis together. Otherwise, oil prices will spike to an all-time high. He said because of Iran, “30% of the world’s energy supplies, about 20% of global trade passages” are at stake. Moreover, Middle-Eastern countries represent 4% of the world’s total GDP. If the crisis further escalates, it will result in fuel inflation and will affect the global growth rate. The crown prince has asked for a peaceful political solution but hasn’t ruled out a military option. He’s also accused Iran of not cooperating in discussions. In a recent development, the Iranian president refused to start talks with the US unless sanctions were removed.

Mohammed bin Salman on Khashoggi killing

The crown price said that he had not ordered the murder of journalist Jamal Khashoggi. Moreover, he said that the crime was heinous. He also promised to take strict action on the people behind it once they’re proven guilty. On October 2, Khashoggi, a US resident, disappeared after entering Saudi Arabia’s consulate in Turkey. Later, on October 20, due to international pressure, Saudi Arabia admitted to the crime. At that time, there were talks of possible sanctions on the kingdom. The CIA believes that bin Salman did, in fact, order the killing.

However, bin Salman publicly denouncing Khashoggi’s killers in front of the US media should strengthen US-Saudi relations. In June, President Donald Trump refused to initiate an FBI inquiry into Khashoggi’s death. The United Nations had requested Trump’s administration do so. After Khashoggi’s death, Trump publicly defended Saudi Arabia and said a $450 billion trade agreement and lower oil prices were at stake. Following Khashoggi’s death, in November, the US Senate decided to vote on a resolution to end US support for Saudi Arabia in Yemen.

Saudi Arabia and the US

Saudi Arabia is an important ally to the US in the Middle East. This bilateral relationship has helped the US secure its energy needs. Saudi Arabia is the largest producer of oil in the Middle East. Moreover, if the US end its support for Saudi Arabia, the kingdom could fall into the hands of Islamic extremists, as was the case in the 1979 Grand Mosque seizure. With abundant energy resources, such groups could be a serious threat to US national security. In the 9/11 attack, 15 out of the 19 hijackers were Saudi Arabian citizens. Still, the US is continuing its diplomatic relations with the kingdom. Moreover, it hasn’t found any evidence against the Saudi Arabian regime.

Impact on energy stocks

In fact, because of this relationship, Trump has been successful in keeping oil prices lower. RBC Capital Market’s Helima Croft indicated that OPEC had failed against Trump to stop oil’s decline. After the sanctions on Iran, around 2 million barrels per day of crude oil disappeared from the market.

Still, US crude oil prices have been trading between $50 and $60 in the past few months. Upstream stock Chesapeake Energy (CHK) has fallen around 33.3%. Range-bound oil prices may have adversely affected CHK’s financials. WTI crude oil prices are up 23.1%. The United States Oil Fund LP (USO) is up 20.7%. USO invests in US crude oil futures.

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