Investors may want to prepare themselves for the possibility of a serious oil market disruption in the near future.
Today, Oct. 19, is the 45th anniversary of the OPEC oil embargo against the U.S. It was this move that spurred the 1970s energy crisis and helped in part lead to the stagflation of 1973 to 1975.
As tensions between the U.S. and Saudi Arabia ramp up in the aftermath of the alleged murder of journalist Jamal Khashoggi, there is a scenario in which a Saudi oil embargo against the U.S. could be repeated. The geopolitical stew of acrimony towards U.S. President Donald Trump from his domestic political enemies together with a Turkish leadership soured in its relationship with the U.S. lately and armed with evidence of the alleged Khashoggi murder could set it off.
There is plenty of circumstantial evidence pointing to Saudi Crown Prince Muhammad bin Salman as the culprit in this sordid case. The Saudis have already changed their story from denying all involvement to suggesting it may have been a botched interrogation, and then issuing a veiled threat of an oil embargo against the U.S. if any sanctions are imposed on the Kingdom as a result.
The grisly details emerging from leaks to the Turkish media are enough to rile up U.S. senators and congressmen from both sides of the aisle. Close Trump ally Lindsey Graham has already come out in favor of sanctions in response to the suspected murder, as has Republican Senator Marco Rubio. Treasury Secretary Steve Mnuchin, who before yesterday was planning on attending the upcoming Saudi investment conference in Riyadh, has since pulled out. Senior Democrats including Senator Diane Feinstein have also suggested that the U.S.-Saudi alliance may not survive the current impasse. Now Democrats are demanding Trump disclose business ties with the Saudis as well.
Trump is feeling the heat, now admitting that Khashoggi was probably killed and that the consequences would be “severe” if so.
Turkey is the lynchpin here. Turkey has the evidence, or at least claims to have it on tape in the form of an audio recording. What does Turkey stand to gain from putting pressure on Trump and trying to catalyze an oil embargo? Well, consider the following. Turkey’s economy has been hurt badly by a falling Turkish lira. The lira has recovered somewhat but it is still far below historical averages versus the dollar. An OPEC oil embargo would crush the dollar and push the lira higher.
But wouldn’t a skyrocketing oil price also hurt Turkey? Maybe somewhat, but Turkey actually imports no crude oil at all from Saudi Arabia. The infographic below taken from the Observatory of Economic Complexity shows exactly where Turkey gets its crude oil from.
Turkey does import a tiny amount of refined petroleum from the Saudis, but only 1.4% of its total refined petroleum imports for 2016, amounting to only $101 million worth. Its main energy trading partner is Russia, which has been antagonized by the U.S. government for some time now as well, has already sold off its Treasury holdings and could also stand a lower dollar and benefit from a higher oil price.
Remember Turkish President Erdogan’s New York Times editorial back in August? The last line of that piece reads, “Failure to reverse this trend of unilateralism and disrespect will require us to start looking for new friends and allies.” Russia could be Turkey's rebound. Erdogan has been in a foul mood as concerns Trump, and now he has the leverage to strike back, with a sense of justice on his side in the shadow of an alleged macabre murder.
By releasing the evidence Turkey does have, Erdogan could force Trump’s hand, and the calls for sanctions against the Saudis would be deafening as the details of Khashoggi’s dismemberment are laid bare to the public. Sanctions against Saudi Arabia could lead to an oil embargo, as the Crown Prince has indirectly threatened already.
The other option could be a coup against the Crown Prince, which would defuse the situation. This is probably more likely than an embargo, since an embargo would also crush the Saudi economy as well and the power corridors in Saudi Arabia surely don’t want that. Still, with the midterm elections on deck and full sanctions against Iranian oil exports about to be in place immediately afterwards, the risk in oil prices is much heavier to the upside than to the downside.
Disclosure: Long USO.