Crude Power: Death, politics and oil in the House of Saud

Jamal Khashoggi was a Saudi journalist, Washington Post columnist and vocal critic of the government of Saudi Arabia. He was planning to get married to his Turkish fiancé and needed to submit paperwork for the wedding at the Saudi consulate in Istanbul. On the morning of Tuesday 2 October, Khashoggi said goodbye to his fiancé and walked through the consulate’s grey and gold doors.

He never came out.

The fallout from Istanbul 

The disappearance and murder of Khashoggi led to a fallout between the House of Saud, the hereditary monarchy that has ruled Saudi Arabia since its creation in 1932, and its traditional Western allies. Britain, France and Germany have called for a “credible investigation” into the missing journalist. While in the US, prominent senators from across the political spectrum have called on the Trump administration to take a more forceful stance in response. Prominent Republicans, Marco Rubio and Jeff Flake, threatened to halt military sales to Saudi Arabia, and fellow senator Lindsay Graham labelled Crown Prince Mohammed bin Salman — the de facto ruler of the desert kingdom and the purported mastermind behind the assassination — as “toxic”.

Private enterprise and international institutions have publicly expressed their concern and disquiet. Companies including Uber, Google, The Economist, Ford and MasterCard, and the managing director of the International Monetary Fund and the chairman of World Bank, have already pulled out of Saudi Arabia’s showpiece business conference, Future Investment Initiative (FII).

The incident has also drastically increased the likelihood of the US Congress passing The No Oil Producing and Exporting Cartels Act (NOPEC). The act would allow the US to sue the Saudi-dominated Organization of the Petroleum Exporting Countries (OPEC) for establishing a monopoly. If Bin Salman is seen to be literally getting away with murder, the US legislative body may well push through NOPEC on a wave of anti-Saudi sentiment.

Will Saudi Arabia crash the global economy?

Riyadh has vowed to retaliate to any punitive economic measures. In an extraordinary departure from its traditional position as self-appointed guarantor of oil market stability, Saudi Arabia threatened to weaponise its massive petroleum reserves. An editorial in a government-owned paper issued a thinly-veiled threat, saying: “If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure”.

The House of Saud has not used oil as a political weapon since the 1973-74 oil crisis, which led to shortages across the Western world. Now, the prospect of rising prices saw an immediate market response in both futures and currency pairs.

The 1973-74 OPEC embargo on sales of oil to Israel’s allies during the Yom Kippur War (or Arab-Isreali War) led to shortages of oil across the western world

WTI crude oil futures rose as soon as the news of Khashoggi’s disappearance broke on the 15 October. Anticipating the geopolitical fallout, WTI prices fluctuated along a wide range, rising to a high of 72.68 before closing at 71.69.

A similar reaction was seen in USDCAD, which is often traded as “proxy for oil” on the foreign exchange markets. Any rise in oil prices means a rise in the CAD. Canada’s oil exports to the US are such a big part of the Canadian economy, that the CAD is almost always affected by changes in the oil market.

Another pair that was probably affected was USDCHF, which also fell on the 15 October. Khashoggi’s disappearance was likely to negatively impact Saudi-US trade relations, which hit the dollar, while simultaneously supporting the Swiss franc, which is often seen as a “safe haven” by investors.

Tensions between the US and Saudi Arabia are likely to hit the USD and strengthen the “safe haven” Swiss franc. Pro-tip: If the news is bad, short the USDCHF

Mixing oil and politics is a double-edged sword for Saudi Arabia. Cutting production to send oil prices soaring may pay short-term dividends for Riyadh, but the aftermath would be a global push towards non-OPEC produced oil and alternate sources of energy. It would also likely see a collapse in non-oil-related foreign direct investment, which is vital for bin Salman to fund his economic reform programme.

This situation is unlikely to come to pass. It would be self-defeating for the Saudis, and the Trump administration is unlikely to do anything to seriously destabilise either Saudi Arabia or Bin Salaman’s rule.

The three pillars of Saudi-US policy are oil, arms and regional stability.

Oil, guns and the status quo

The three pillars of Saudi-US policy are oil, arms and regional stability. Despite US Treasury Secretary Steve Mnuchin announcing that he will not attend the IFF, Trump continues to link America’s response to the apparent murder to Saudi arms sales. Speaking to journalists, Trump said, “whether or not we should stop $110 billion [of Saudi invesment] from being spent in this country… that would not be acceptable to me”.

With midterm elections looming, the revelations that Khashoggi had ties in the past to the Muslim Brotherhood and Osama Bin Laden are likely to mean that he has less resonance amongst Trump heartland voters. And thus even less impetus in the White House to disrupt the geopolitical balance. 

Although there is the potential for a rift between Washington and Riyadh, an irreparable break is unlikely. If US-Saudi ties can survive the US categorising “donors in Saudi Arabia [as] the most significant source of funding to Sunni terrorist groups worldwide”, the apparent murder of one journalist is unlikely to alter decades of US foreign policy. An interdependent relationship built around oil market stability, mutual security goals, and Saudi arms purchases and American inward investment will ensure that the more things change, the more they stay the same.

If tensions fall, back the dollar 

A continuation of the relatively stable status quo between Riyadh and Washington would probably benefit the US dollar. Although the dollar gained when the Turkish lira crashed earlier this year, times have changed. Investors are now more wary of the risks international trade conflicts pose to the US economy. For example, a fallout between the US and Saudi Arabia could jeopardise a USD 110 billion arms deal with the Saudis. Losing this deal would move the dollar, to say nothing of the negative impact on the US arms industry. 

The political and economic impetus is all behind ensuring stability, which means there is a strong argument for backing a strong US dollar in the probable event that tensions settle down. The Swiss franc is highly correlated to risk in the market, and we see potential for the US Dollar to rise against the “safe haven” franc in the event the US buries the Khasshogi incident.

If tensions rise, the best opportunity in the forex markets would be to buy the Canadian dollar versus the US dollar. In trading terms: short sell USDCAD

Should public and political pressure for the US to retaliate for Khashoggi’s apparent murder result in real action, it could lead to a sudden sharp rise in the price of oil. In such a situation, the most probable way to profit in the forex markets would be to buy the Canadian dollar versus the US dollar. In trading terms: short sell USDCAD.

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