Oil surges on Saudi Arabia, Iran tensions as 2016 trading starts

The Consultative Assembly of Saudi Arabia issued a statement Monday saying it supported the government’s decision to cut ties with Iran “after becoming impatient with Iran’s polices in support of terrorism”. The heightened tensions between the two OPEC producers is worrying for investors as most Saudi oil production comes from its Eastern Province, which is dominated by Shiites and this is the area that could suffer the most if there is an escalation in friction between the two countries.

The oil price surrendered earlier gains that boosted futures by as much as 2 percent after data showed Chinese factory activity shrank for a 10th straight month, prompting a 7-percent fall on Chinese stock markets and for trading to be suspended. Global oil benchmark Brent initially climbed over $1.2 to a high of $38.50 per barrel on Monday, before easing back to $37.48 at 0744 GMT, up 20 cents. U.S. crude’s West Texas Intermediate (WTI) futures were up 29 cents at $37.33.

The amount of additional Iranian crude reaching foreign buyers will depend on conditions in an oil market oversupplied by 2.5 million to 3 million barrels a day, the Iranian Oil Ministry’s Shana news agency reported on Saturday, citing Mohsen Ghamsari, the head of global affairs at state-run National Iranian Oil Co. For him, a decline in the USA crude oil supply, coupled with flat or low production from other non-OPEC members, will help global oil prices to rebound this year. Mainly Shi’ite Muslim Iran and Saudi Arabia’s Sunni Muslim monarchy have clashed for years in the Middle East in political conflicts that have followed along sectarian lines. Along with the USA, the Organization of the Petroleum Exporting Countries (OPEC) – the global cartel of oil producers – also pumped up more crude. U.S. investment bank Morgan Stanley said in its latest note published before Christmas and headlined “Headwinds Growing for 2016 Oil” that “the hope for a rebalancing in 2016 continues to suffer serious setbacks.’ Still analysts would have to lower their forecasts sharply to reverse expectations for a price recoery in 2016”.

“The only scenario in which it makes sense for OPEC to cut production would be a collapse in demand, so a hard landing in China could potentially trigger such a move”, Capital Economics commodities analyst Thomas Pugh said.

Oil Minister Bijan Zanganeh said Iran did not plan to exacerbate an already bearish oil market.

Qamsari said Iran would be looking to export its crude to Asia and Europe giving examples of China and India as potential buyers post sanctions. Iran plans to raise output by half a million to 1 million barrels per day (bpd) after sanctions are lifted.

In Russia oil output hit a post-Soviet high in 2015, averaging 10.73 million bpd.