Chilling Saudi-US relations not expected to heat up oil market

Traders in the crude oil options pit at the New York Mercantile Exchange.
Jin Lee | Bloomberg | Getty Images
Traders in the crude oil options pit at the New York Mercantile Exchange.

Signs of friction between the U.S. and Saudi Arabia have caught the attention of the oil market, but traders aren't concerned about supply issues for now.

Saudi Arabia has been unhappy about the U.S. approach to Syria and Iran, and it is apparently making that clear in diplomatic circles. Last week, it turned down a two-year term on the U.N. Security Council in protest against inaction over Syria, even though that body oversees the United Nation's handling of Syria.

"With all the supply issues we've had from all the countries throughout the Arab spring, the Saudi's have consistently filled the gap," said John Kilduff of Again Capital. "We have to watch if they would, not use oil as a weapon, but as a tool to teach us a lesson that they are unhappy."

News reports Tuesday quoted sources saying that Prince Bandar Bin Sultan al-Saud, the kingdom's respected and powerful intelligence chief, told European diplomats last weekend that he plans to cut back cooperation with the U.S. on arming and training Syrian rebels, in protest of U.S. policy in the region.

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"I don't think it's going to affect our oil relationship," said Andrew Lipow, president of Lipow Oil Associates. "But I do think there's a lot of turmoil in the Middle East, and you certainly have the Saudis—who dislike the Iranians—upset about the fact there could be a thawing relationship between the U.S. and Iran. ... The Saudis have been showing their displeasure for some time."

Lipow said the U.S. will continue to be an important market to Saudi Arabia, which owns 50 percent of the Motiva refinery in Texas in a joint venture with Shell.

"They just finished spending $10 billion in Port Arthur on the expansion," he said.

Iran's new president Hassam Rouhani has been on a "charm offensive," since visiting the U.N. last month. He received a historic phone call from President Barack Obama as he was leaving New York, breaking 30 years of silence between leaders of the two countries.

Rouhani has said Iran has no intention of developing nuclear weapons. Analysts do not expect sanctions to be lifted any time soon, even if there is progress in the talks. But Reuters reported Tuesday that Iran is already reaching out to its old oil buyers and is talking price cuts if sanctions are lifted.

As for Syria, the Obama Administration was adamant about making the regime there accountable for the deaths of civilians from a gas attack. The U.S. prepared to bomb the country but reversed course at the last minute and the UN has now taken the lead.

Saudi Arabia had been lobbying for the temporary seat on the Security Council, so it was surprising when the kingdom turned it down, citing the council's ineffectiveness in dealing with Syria and the Israeli-Palestinian conflict.

Brent crude, reflecting the international oil price, ticked slightly higher on the report but slipped back. West Texas Intermediate, on the other hand, was sharply lower after delayed U.S. inventory data showed a supply buildup in domestic crude.

WTI futures fell below their 200-day moving average of $98.60 for the first time since June. The futures, scheduled to expire at the close of business Tuesday, dipped $1.42 to close at $97.80.

The December contract was trading just above $98.

"It looks the same ... very bearish on a technical basis," Kilduff said of the December contract. "The U.S. refining industry has slowed from its summer peak, and that's allowing the crude oil inventories to really replenish and build back up, given the surge in shale production."

The Saudis have been instrumental in the West's embargo on Iranian oil. Iran is being sanctioned for its nuclear program, which it says is not for weapons use. An improvement in U.S.-Iran relations would return more than 1 million barrels a day to the world market.

"They really don't want that Iranian oil back on the market," said Tradition Energy analyst Gene McGillian. It may be that the Saudis withdrew from the Security Council because they are more comfortable working behind the scenes, he added.

The Saudis have been producing record amounts of oil to make up the for the shortfall from Iran. Saudi output is over 10 million barrels a day. The U.S. has supplanted Russia this year as the world's largest producer of both oil and gas, but in oil production the Saudis remain at the top.

The U.S. produced 7.4 million barrels a day in the week ended Oct. 11, down from 7.8 million barrels the week earlier.

Saudi Arabia exported an average of 1.4 million barrels a day of total petroleum liquids to the United States last year, up from 1.2 million in 2011. That represented 16 percent of U.S. crude imports and was second only to those from Canada.

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U.S. oil inventory data for last week is expected to be reported Wednesday at 10:30 a.m. ET, and McGillian expects to see another build of 3 million barrels. He was skeptical that the Saudi reports affected oil markets.

"I don't think it really spilled over into the oil market," he said. "There are reports the Saudis are going to try to increase their production to put pressure on Iran but they do that anyway."

McGillian said there's plenty of reasons for U.S. oil to remain depressed, and the spread is widening dramatically with Brent.

"We pumped nearly 19 million barrels back into storage in the United States in the last four weeks," he said, "and you haven't seen a pickup in demand."

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.