Saudi Arabia is coming up with a cover story in the death of Saudi journalist Jamal Khashoggi while the fate of the global oil market hangs in the balance.

After Saudi Arabia made veiled threats against the world that it might use oil as a political weapon to deflect from punishment for the murder of Mr. Khashoggi, now it looks as if they are trying to find a way out of the blame for what is now a major political nightmare. 

President Trump’s assertion that he had spoken to Saudi Arabia's king Saudi King Salman and Crown Prince Mohammed bin Salman  "firmly" denied any involvement in the disappearance of journalist and suggested that it may have been, he is not sure, some rogue elements below the King and Crown Prince’s pay grade. Of course, rogue agents are blindness whether willful or not is a convenient excuse to try to minimize the geopolitical and economic fallout from this despicable act.

So, it appears that the first step by Saudi Arabia to defuse the crisis is to admit that what had happened was an interrogation that went wrong. They are going to say that some lower level thug took it upon himself to kill Mr. Khashoggi, even after Crown Prince Salman was on record saying that he has left the scene of the crime. Secretary of State Mike Pompeo flew to Saudi Arabia to try to avoid this blowing up any further and if I were the Saudis, I'll be ready to accept some punishment for this crime, return the body of Khashoggi to his family, and pay them damages and be ready to pump more oil when the U.S. says they need it, especially ahead of the November Iranian sanctions.

In fact, the Saudis may already be trying to win back President Trump’s favor by lowering prices on U.S. oil, while raising them on everyone else. The Wall Street Journal reported that “The Saudi Arabian Oil Co. raised crude prices for many of its global customers in early October, but kept them cheaper for its clients in the U.S. When a puzzled European buyer asked a senior Aramco executive why his American rivals were getting a better deal, he said he got an unequivocal response: "It's a message to Trump."

The diplomatic moves by the Saudis and the meeting with U.S. Secretary of State Mike Pompeo seemed to ease the oil markets concern that the Saudis would somehow follow through on its threat to drive oil to $200 a barrel, yet even if they raise output we still must worry if their efforts will be enough. While fears of a market sell-off and seasonally weak refinery demand has weighed on prices in the short run, it has far from solved the problem in the bigger picture. Global spare production capacity is almost non-existent. 

Reuters is reporting that OPEC Secretary-General Mohammad Barkindo is warning that global spare oil capacity was shrinking, adding that producers and companies should increase their production capacities and invest more to meet current demand. “Countries that are holding spare capacity are now shrinking because there has been less investment in exploration,” Barkindo said on the sidelines of the IHS CERA conference. The global oil sector needs about $11 trillion in investment to meet future oil needs in the period up to 2040, Barkindo said, adding that import-dependent countries such as India were concerned about future oil supply.

The man is right. As I have written many times before, the drop in capital spending in recent years has left the global market in a precarious state. Not only have we underinvested, but we also failed to look for new sources of oil that can be brought on quickly. While we did add some new oil rigs last week in the shale patch the Permian pipelines are clogged but we do expect some more capacity to come on soon.

Maintenance season on refineries is continuing and that should lead to an increase in oil supply. Yet, products will fall and we are still going to be short of distillate supply.