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Oil Prices Surge over Saudi, Iran Rift

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Oil prices jumped on Monday, January 4, following  a breakdown in diplomatic ties between Saudi Arabia and Iran that some speculated could result in supply restrictions.

Saudi Arabia’s execution of a dissident cleric on Saturday inflamed sectarian tensions, sparking some worry among traders that crude output in the world’s most prolific oil-producing region could be threatened. Saudi Arabia and several of its allies have severed or downgraded diplomatic ties with Iran.

Bahrain and Sudan have severed diplomatic ties with Iran in solidarity with Saudi Arabia. The United Arab Emirates has downgraded its diplomatic team.

Saudi Arabia produced 10.2 million barrels a day of crude oil in November, or about 11% of global output of crude and related liquids, according to the International Energy Agency. Iran produced 2.9 million barrels a day of crude that month.

Light, sweet crude for February delivery recently fell 41 cents, or 1.1%, to $36.63 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 20 cents, or 0.5%, to $37.08 a barrel on ICE Futures Europe.

Brent prices fell 35% last year, their third straight annual loss, as a global supply glut showed few signs of abating. U.S. prices posted a second straight annual loss for the first time since 1998.

More than 18 months into the crude-price rout, oil production remains high around the world as producers compete for market share, keeping global inventories high.

Some oil analysts and investors have argued for months that the low price of crude doesn’t adequately account for a possible supply disruption due to violence or unrest.

The oil market has been vulnerable to sharp rebounds in recent months as traders who had bet on lower prices quickly reverse course.

Increased concerns about geopolitical conflicts could have prompted some traders to close out their bearish bets.

But further tension between Saudi Arabia and Iran could also expand the global glut of crude oil, weighing on prices, analysts said, as the two producers compete for market share.

Iran is expected to increase its output by hundreds of thousands of barrels a day this year if international sanctions on the country are lifted, and Saudi Arabia has already expressed its unwillingness to cut production to make room for Iranian barrels.

 

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