Oil Prices Drop amid Saudi Tensions

Oil prices dropped on Monday, retreating from early gains driven by concerns over supply caused by tension over the disappearance of a prominent journalist, although worries over the long-term demand outlook weighed on sentiment.

Brent crude futures for December delivery fell 0.5 percent to $79.99 per barrel. The international benchmark rose $1.49 a barrel to a high of $81.23 earlier in the session.

November contract US West Texas Intermediate (WTI) was down 0.4 percent to $71.00 per barrel.

Commodities strategist Warren Patterson said growing tensions over the disappearance of journalist Jamal Khashoggi at the Saudi consulate in Istanbul has proved supportive for oil prices.

Missing Saudi Journalist Causes Worries in the Oil Market

Relations between Saudi Arabia and some parts of the international community have deteriorated quickly after Khashoggi, who is a critic of Riyadh and resided in the US, went missing on October 2 after visiting the Saudi consulate in Istanbul.

US President Donald Trump threatened on Saturday that there would be severe punishment for Saudi Arabia if it is turns out that Khashoggi was killed in the consulate.

Turkey reportedly believes Khashoggi was intentionally killed inside the establishment and his body removed. Riyadh has dismissed the claims.

In response to Trump’s statements, Saudi Arabia said on Sunday it would retaliate to any potential economic sanctions against it with an even stronger measure, adding that its economy has an influential and vital role in the global economy.

Any Saudi retaliation will presumably mainly come through reduced oil supply and higher prices which would not help market sentiment, according to Chief Economist and Head of Research Robert Carnell.

Chief Economist Michael Heise stated that oil could indeed be used as a tool of retaliation by Riyadh.

They may contemplate doing that, depending on how tough the sanctions, for example by the US might be. That might lead them to eventually use oil as a weapon, Heise said, adding that he is not too optimistic on that issue.

Heise stated that if oil prices continue to react in an upward direction that affects many markets, including several emerging markets in Asia, which are net importers of oil. He believes that is most important transmission channel of the crisis.

Analysts, on the other hand, expressed doubt over Saudi Arabia’s plans of retaliation that would harm global oil supply.

The Saudi embassy in Washington DC later clarified the statement, saying Saudi Arabia extends its appreciation to all, including the US, for refraining from jumping to conclusions on the ongoing investigation.

So far, the oil market is withstanding the verbal war and though prices are slightly higher, they are good $5 below the peak last week, according analyst Fiona Cincotta.

Pressuring prices, Friday’s monthly report from the International Energy Agency (IEA) stated that the market seemed adequately supplied for now and lowered its forecasts for world oil demand growth this and next.

The Organization of the Petroleum Exporting Countries (OPEC), along with Russia and other oil producers such as US shale companies had raised production sharply since May, according to the IEA, increasing output by 1.4 million barrels per day (bpd).

Commodities analyst Carsten Fritsch said these are very bearish for oil prices.

The OPEC saw the market to be well supplied and the group was careful of creating a glut in 2019, stated the secretary general of the OPEC.

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