Growing tension between Saudi Arabia and Iran fueled a climb in oil prices Monday, as traders worried that an unstable political situation in the Middle East will complicate the outlook for oil in 2016.
February West Texas Intermediate crude CLG6, -0.13% tacked on 55 cents, or 1.5%, to $37.59 a barrel on the New York Mercantile Exchange, after hitting a high of $38.39. February Brent crude LCOG6, +0.72% was up 94 cents, or 2.4%, to $38.22 a barrel on London’s ICE Futures exchange.
The advances came after Saudi Arabia on Sunday severed diplomatic ties with Iran, a fellow member of the Organization of the Petroleum Exporting Countries. The Saudi move came as hundreds of Iranians protested against the kingdom’s Saturday execution of Nemer-al-Nemer, a prominent Shiite cleric.
“If the situation becomes more forceful between the two countries—Saudi Arabia and Iran—it could bring an enormous spike for the oil price,” said Naeem Aslam, chief market analyst at AvaTrade.
“The fact is that Saudi Arabia is already struggling with [the] dropping oil price and fighting a war on its Syrian border, and any further strains will immensely impact any foreign direct investment,” he said in a note. “The Saudis really need to implement policies which can bring more stability in the region.”
Overall, the tension between two major producers is adding to the unpredictability of oil prices, which slumped to multiyear lows in 2015 amid a supply glut. Expectations for more barrels coming on stream from Iran this year were a key factor in oil’s tumble, after an international agreement over its nuclear program paved the way for an expected end this year to Western sanctions on buying its oil.
Iran, the No. 3 oil producer in the Middle East, last year said it planned to increase its oil exports by at least 500,000 barrels once sanctions were lifted.
Iran’s expected production ramp-up, coupled with the determination of other producers like Saudi Arabia and Russia to keep output high, has spurred fears that the excess of crude would weigh on prices again this year. Oil could fall as low as $20 a barrel before producers start making significant production cuts, Goldman Sachs forecast last month.
But an escalation of tensions between two of the Middle East’s key regional powers could delay any further slide in prices.
“Any clash between two key oil producers and possible supply chain disruption will always create some psychological reaction on prices,” said Gao Jian, an energy analyst at Guangzhou, China-based SCI International. “But a bigger reason why prices rose higher today is the rising uncertainty over how this conflict might affect the expected lift of sanctions on Iran. Any possibility of a delay or a cancellation of the ban lift will be positive to oil prices.”
Petroleum products traded on Nymex also climbed. February gasoline RBG6, +1.77% climbed by 4.2 cents, or 3.3%, to $1.313 a gallon and February heating oil HOG6, +1.23% added 4.5 cents, or 4%, to $1.168 a gallon.
February natural gas NGG16, -0.30% however, slumped 1.8 cents, or 0.8% to $2.319 per million British thermal units, pulling back after a rally on the last trading day of 2015.
(via Market Watch)