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Could Situation With Saudi Arabia Mean Big Spike In Oil Prices?

October 17, 2018 - 2:52 pm
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NEW YORK (WCBS 880) -- What could the current uncertainty surrounding U.S.-Saudi relations mean for oil and gasoline prices?

Saudi Arabia, of course, is a major oil producer. But the government there is now under fire amid concerns that it might have been responsible for the death of journalist Jamal Khashoggi at the Saudi consulate in Istanbul earlier this month.

Tom Kloza, longtime oil analyst at the Oil Information Service said the possible effect of the controversy on oil prices is on “everyone’s radar” right now.

“I mean, it has the potential to really blow up and to send prices to numbers that I didn’t think we’d see again in our lifetime. Right now, the rhetoric coming out of Trump’s State Department and some other agencies is pretty temperate if not conciliatory, so it’s taking a back seat to some other news,” Kloza told WCBS 880’s Steve Scott. “But the Saudis are the swing producer. The United States will be the swing producer probably in late 2019, so we’ve got about nine or 10 months here where we really have to worry about Saudis continuing to pump, oh, about 7 million barrels a day of exports onto the market.”

The Saudis have already used oil and the threat of reduced production and higher prices as potential leverage.

“They’ve even made some statements that talked about oil as a weapon and acknowledged that the Trump administration didn’t like $80 oil, mentioning that, ‘Well, you might not like it if it went to $100, $200 a barrel,” Kloza said. “That’s probably hyperbole – we would see incredible demand destruction, and we’d probably see an awful lot of regimes and administrations embrace electrification if that happened. But the threat is certainly out there.”

But there is also the possibility of the Saudis actually lowering oil prices so as to curry favor.

 “They probably have been putting out some extra crude on the market in the last couple of months. The question is really how much extra crude do they have in their pockets that they can access right away?” Kloza said. “And with Iran getting squeezed with handcuffs that sort of disabled their ability to export crude, and Libya, Venezuela, and Nigeria hot spots, there aren’t that many alternatives when the world is using about 100 million barrels a day of oil, so it’s going to be very important to watch the Saudis and to see what their policy is as we go forward, and to really measure the rhetoric and see how belligerent it gets.”

Meanwhile, new figures are out for U.S. oil inventories. They are up by 20 million barrels of crude oil in the last three weeks.

“We also seem to be losing our edge or losing a little bit of the demand growth that had been occurring year on year – not just in the United States, but emerging countries as well. So you know, there’s one thing that could really impact oil prices beyond sort of the geopolitics, and that’s demand. Most of the program trading and most of the investment houses figure that demand growth worldwide is going to be about 1.6 million barrels a day,” Kloza said.

Kloza said the increase in domestic oil production could take some of the heat of the situation with Saudi Arabia, but there are limits.

“The problem is the United States has the capability of increasing production substantially, but we don’t have the pipelines to take that extra crude from West Texas, North Dakota, the Rockies to the market very, very quickly. So as I say, we’ve probably got an interval of about 9 to 12 months where we are vulnerable to whatever happens in the Middle East,” he said. “We know that Iran is a hot spot. We thought that the Saudi Arabian production would be pretty stable. Now that has been thrown into doubt.”

As to gas prices, Kloza said we can expect them to come down a little bit in the next week. But longer-term for the rest of the year, gas prices will likely be steady in November and December and much higher than the same period last year.

“And then next year, we start the entire merry-go-round again, and I think gas prices and crude oil prices will be very similar to where they’ve been in the last six weeks,” Kloza said.