Analysis: Bolton’s Syria snafu reveals oil’s biggest risk

It is difficult to tell who is more peeved at National Security Adviser John Bolton right now: his boss President Donald Trump or Turkey’s President Recep Tayyip Erdogan.

In seeking to reassure Israel this weekend about the withdrawal of US troops from Syria, Bolton added some nuances that first prompted Trump to tweet nothing had changed and then drew outrage from Erdogan, who skipped the reassuring meeting Bolton was supposed to have with him.

Secretary of State Mike Pompeo must surely be relishing the prospect of his own damage-limitation tour of the Middle East, which just got under way.

Meanwhile, in the somewhat gentler environs of Texas, the Federal Reserve Bank of Dallas just published the latest edition of its quarterly energy survey and quoted one anonymous oil executive saying this:

“The administration’s head fake with the Saudis regarding Iran sanctions, followed by leverage on Saudi Arabia with the Khashoggi murder, have compromised oil price market dynamics. The volatility in commodity and capital markets is unsettling, along with the challenge to the administration’s ongoing leadership posed by the Democratic majority in the House. The administration is our largest uncertainty in our business at this point, as they want low oil prices and will do everything in their power to deliver low oil prices.”

All these things are not unrelated.

Trump’s desire to pull troops out of Syria shouldn’t be a shock. Antipathy to US foreign entanglements has been one of the more consistent positions for this president and fits with a broader shift in the global order that predates Trump and will likely outlast him.

What did come as a shock was the way Trump sprung his decision last month, followed quickly by the resignations of Defense Secretary James Mattis and Brett McGurk, the US envoy overseeing efforts to defeat the Islamic State of Iraq and Levant (ISIL, also known as ISIS). The dissonance over what exactly is happening, how and when has only grown since.

Whether or not you regard this as 10-dimensional chess or mere disarray, we can surely agree it comes across as somewhat mercurial and creates one of those margins where misunderstanding can flourish.

Scapegoating the White House?

The “head fake” over Iranian sanctions lamented by that oil executive is a good example of this in action.

The widespread assumption that Washington would tighten the screws on Iran immediately, in the fall, stoked an oil rally even as Saudi Arabia boosted output to offset any concerns about supply. Trump’s granting of waivers to several countries importing Iranian oil (with an eye on gasoline in advance of midterms) undercut that, coinciding with an accelerating slide in prices. Little wonder another anonymous oil boss told the Dallas Fed: “The biggest distraction to conducting business is the uncertainty provided by the erratic and dysfunctional behaviour of the current presidential administration.”

Are they scapegoating the White House to some degree? Undoubtedly. Signs of weak demand and swaps dealers scrambling to reduce risk on hedging books were also at play in the oil sell-off. Moreover, in the same Dallas Fed survey, almost half the respondents said their primary goal in 2019 was to grow production. Just seven percent prioritised returning capital to shareholders. Given the industry’s broken relationship with investors, this is the opposite of getting with the programme.

Still, the extra layer of risk emanating from Washington, DC, is real enough, and that’s actually a novel thing. A few years ago, oil bosses griped about this or that federal regulation. Now, they fret about geopolitical curve balls and direct interventions in the oil market, something traditionally associated with the likes of OPEC members, not the US.

If it’s a novel feeling in Houston’s c-suites, imagine how it plays in the palaces and ministries of the Middle East. A region where virtually every state has come to either rely on US support (or regard it as a reliable adversary) must now adjust to not merely a more transactional Washington, but also one with conflicting voices and a changing set of faces. In short, the risk of local governments and the US talking past each other has ratcheted up in a region where the room for misunderstanding is vanishingly small. 

Saudi Arabia’s aggressive posture

It is useful that the anonymous E&P executive specifically cited the Khashoggi affair because it gets at what may be the biggest, and most unexpected, risk to emerge. The backlash against the killing of journalist Jamal Khashoggi clearly caught Saudi Arabia and its de facto leader, Crown Prince Mohammed bin Salman (MBS), off-guard. In several respects – public opinion, Congress’ freedom to take a different line than the White House – that had nothing to do with Trump per se.

But in light of the administration’s close embrace of MBS and the great lengths to which Trump went in downplaying the incident, it is legitimate to ask just how enabled the prince feels in conducting policy. That’s especially so as Saudi Arabia’s foreign posture has become notably more aggressive, in parallel with its power structure transforming away from one of consensus among the ruling family towards a more autocratic model.

The added wrinkle is Trump’s own domestic headaches, as exemplified by the current face-off with a Democratic-controlled House over his wall idea. These pressures are likely to exacerbate Trump’s penchant for dramatic moves and populist crusades, with foreign policy and petrol prices likely to figure large (not least because they mostly lie beyond the reach of Congress).

As with last year’s waivers for Iranian sanctions, the interplay of domestic US politics, oil markets and the administration’s mixed messaging could make for many a miscalculation. Consider what might happen if, like Erdogan today, MBS made plans for a bold move assuming US backing that turned out to be less forthright than anticipated.

The relationship between Washington and Riyadh may look more solid than it has in a long time. That could be its biggest problem.

This analysis was originally published by Bloomberg News