Column: The oil market may see the death of Khashoggi, but not Iran

LAUNCESTON, Australia (Reuters) – The murder of a journalist by Saudi Arabia and the rise of US sanctions against Iran have added a layer of uncertainty to the crude oil markets , creating a dilemma as to whether these events are real price factors or a temporary noise.

The death of Saudi journalist Jamal Khashoggi at the Kingdom's consulate in Istanbul has been on the news headlines, often with conflicting messages about the prospects for oil supply and prices.

Examples include a veiled Saudi threat to restrict oil production in response to any sanctions against the assassination, and a suggestion that US President Donald Trump gently pedal on Khashoggi's death to support his Saudi allies and increase his influence on them to reinforce the crude output.

Although the media have the task of following the story and all the angles associated with it, the twists and turns of the narrative do not provide much insight into the likely evolution of the crude oil market.

Oil analysts are often reluctant to take part in political discussions, preferring the relative security of the fundamentals of supply and demand, convinced that they will eventually overcome what they hope will be temporary influences.

But perhaps the best approach would be to step back and try to examine with passion the likely and reasonable results of Khashoggi's assassination.

According to the details available, the death appears to be either a premeditated murder, approved by the state, or the result of a heavy incompetence that has resulted in Khashoggi's death.

Be that as it may, the probable result is the condemnation and the action of the Western countries, as well as the trial of their authors, all with the aim of trying to avoid blaming the Crown Prince of Saudi Arabia, Mohammed bin Salman.

What does this mean for the oil market? Most likely very little beyond what is already happening.

The Saudis will continue to try to increase their production and meet the demand of the consumer countries forced to reduce their purchases of Iranian crude.

And while the killing of Khashoggi can generate anger at Saudi Arabia's covert concealment attempt and raise concerns about the concrete consequences of Trump's ongoing characterization of the media as "the enemy of people ", it is likely to be as usual.

The likelihood that Saudi Arabia is trying to increase oil production, however, does not answer the question of whether this will be enough to offset the loss of Iranian barrels.

UNCERTAINTY IN IRAN

US sanctions against Iran are increasing at the beginning of next month and the stated goal of the Trump government is to reduce exports of the Islamic republic to zero.

Nobody believes this is likely. The problem, however, is how much less oil Iran will supply to the world market, and can this be manufactured elsewhere.

Monitoring Iranian exports has become more difficult over the last few weeks as oil tankers in the country have decided to deactivate their tracking controllers.

It seems likely that Iran's exports are around 2 million barrels a day, 700,000 to 800,000 bpd below potential.

It also seems clear that the Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the largest producer, has not so far been able to offset the reduction in Iran's supply.

Saudi Energy Minister Khalid al-Falih said that OPEC and its non-OPEC allies, including Russia, would inject an additional 1 million bpd after the signing of the agreement. An agreement in June to increase supplies to compensate for the losses caused by the sanctions imposed on Iran.

However, an internal document prepared by OPEC headquarters in Vienna for a meeting of a technical group on Friday showed that OPEC members, with the exception of Nigeria, Libya and Congo, did not than an additional 428,000 bpd in September compared to May.

This suggests that the market may be short of oil if US sanctions force more buyers to avoid Iranian crude.

Once again, politics plays a role in this process. US Treasury Secretary Steven Mnuchin gave seemingly contradictory statements in an interview with Reuters in Jerusalem on October 21st.

Mr Mnuchin said it would be more difficult for buyers to obtain waivers to continue buying Iranian crude than under the sanctions put in place under President Barrack Obama's administration.

But he also said that the loss of Iranian cargoes was already integrated into the market and he did not expect oil costs to increase as a result of re-imposed sanctions next month.

If, however, the supply of Iranian crude is severely reduced, it is likely that Mnuchin discovers that the market is currently set only on the pricing corresponding to the current reduction in Tehran's oil shipments.

Relying on increased oil production from other places, such as American shales, ignores differences in raw grades and will not necessarily help to reduce medium to high losses in Iran.

Overall, as disturbing as Khashoggi's assassination is, the impact on the oil market is likely to be mitigated as it is not in anyone's interest to cause disruption.

At the same time, the impact of the new US sanctions on Tehran has not yet been quantified and could lead to a "Who smiles first" scenario, as re-imposed restrictions on barrel trade Iranians would likely increase prices and cause damage to the United States and its oil-consuming allies.