Oil Market Shakes Off Iran-Saudi Clash

Iran-Saudi tensions fuelled oil prices at the start of 2016 but weak Chinese economic data capped the gains.

The oil price rose in early trade on January 4 after Saudi Arabia’s execution of a dissident cleric enraged Iran and caused concern over supply by two of the world’s top oil producers. However, weaker-than-expected Chinese manufacturing data and falling Asian stock markets renewed worries about demand from the world’s second biggest oil consumer, limiting crude oil gains.

"Quite surprisingly, people thought with such tension going on from two major oil producers there will be a jump in the price but in fact it wasn’t,” London-based energy expert Manouchehr Takin told New Europe by phone on January 4, adding that there is plenty of oil. "The supply is sufficient; there is excess flow of oil coming into the market so even with the suspension there will be still enough in the storages, more than two billion barrels of oil are in storages in different parts of the world,” Takin said.

Riyadh cut off diplomatic relations with Iran after the kingdom’s embassy in Tehran was attacked amid protests over the execution of the Shiite cleric Nemer al-Nemer. On January 4, Bahrain said it would also cut its diplomatic ties with Tehran.

But Takin told New Europe that "the market probably thinks this diplomatic clash and the protests, which are against the embassies, could not lead to any disruption of oil”.

Saudi Arabia’s Foreign Minister Adel al-Jubeir said Shia-ruled Iran’s diplomatic staff in Saudi Arabia had been given 48 hours to leave the Sunni-led kingdom. Meanwhile, Russia said it regrets the escalation of tensions between Saudi Arabia and Iran, and offers to act as a mediator of the ongoing conflict. A diplomat reportedly said that Moscow has friendly ties both with Tehran and Riyadh, and "is willing to play, if necessary, a role as a mediator in the settlement of existing and emerging discords between these countries”.

The oil price remains stubbornly weak, but renewed tensions in the Middle East have prompted intense volatility. During the Asian session overnight the US and international benchmarks rose as much as 3.4% and 2.4% respectively compared to where they had ended 2015, touching close to $38.50 a barrel. Gains were later pared and Brent crude, which determines prices paid around the world including for oil exported from the North Sea, was up just 0.4% to $37.40 a barrel this morning. But this again turned as the day wore on and by late afternoon in London Brent was up 3.9% at $38.70.

Both Iran and Saudi Arabia are major oil-producing countries, and founding members of the Organization of Petroleum Exporting Countries (OPEC).

Geopolitical tensions in the Middle East typically cause prices to rise as traders worry about supply disruptions. But in this case, both Iran and Saudi Arabia are likely to keep pumping oil at full capacity, contributing to the global supply glut that has kept prices at very low levels in recent months. In 2015, oil prices dropped 35%.

OPEC has refused to cut production to lift the prices. The Saudi-led cartel is trying to squeeze out US shale producers.

Iran’s oil production has long been reined in by sanctions, but the country plans to increase production by as much as 1.5 million barrels a day in 2016. However, Washington has always made clear that not all of the sanctions are related to the question of whether Tehran was pursuing a nuclear weapons programme. Given that Saudi Arabia is a close US ally, it is highly unlikely that US companies will either be willing or able to invest in Iran as long as Iran-Saudi tensions remain high. EU companies are more likely to secure a stake in Iranian oil and gas ventures but will also probably take into consideration the geopolitical tensions.

If rising tension in the Middle East causes the oil price to rise, this will benefit Riyadh. "If it boosts the oil price it will be for everybody. But Saudi Arabia because it is producing more than 10 million obviously gets the best,” Takin said.