Diplomatic ties cut in the Middle East

Oil prices were up Monday morning as tension between nations in the Middle East continue to rise. Saudi Arabia’s execution of Shia Muslim cleric Nemer al-Nemer on Saturday ignited rage in Tehran, where the Saudi Arabian embassy was attacked. Saudi Arabia, along with Bahrain, Sudan and the U.A.E., have downgraded political ties with Iran following the attack.

Bahrain ordered all members of Iran’s diplomatic mission to leave the country within 48 hours, while the U.A.E. has withdrawn its ambassador, leaving its charges d’affaires in Tehran. The Saudi authorities cancelled all commercial air traffic between Iran and the kingdom.

In Tehran, Iran’s Foreign Ministry accused Saudi Arabia of trying to exacerbate sectarian tensions following the execution of al-Nemer, who led antigovernment protests in the kingdom in 2011.

Saudi Arabia “is engulfed by domestic and foreign crises and is pursuing a policy of escalating tension in the region,” Iranian Foreign Ministry spokesman Hossein Jaber Ansari said, according to the official Islamic Republic News Agency.

Oil gives back gains

While crude oil prices were initially up Monday following the political unrest in the Middle East, both U.S. benchmark WTI and global benchmark Brent retreated by 1:00pm EST. WTI rose above $38.34 per barrel just before 10:00 EST, but gave back nearly $2 by noon. Concerns over the health of the Chinese economy capped gains in oil, reports The Wall Street Journal.

Saudi Arabia produced 10.13 MMBOPD in November, down 25.2 MBOPD from October, based on secondary sources reported in OPEC’s December Oil Market Report.  Total OPEC production grew by 230 MBOPD in November, largely on the back of increased production from Iraq. Iranian production held steady from the previous month at 2.88 MMBOPD.

CL1 Commodity Price

Source: Bloomberg

Intra-OPEC tensions brought center stage

The execution of al-Nemer over the weekend dealt a blow to official political ties between Iran and several other members of OPEC, but the tension between Iran and Saudi Arabia are not new.

The two countries have been on opposite sides of the conflicts in both Syria and Yemen, while the religious animosity between the majority Sunni Muslim kingdom, and the Shia Muslim republic of Iran cut much deeper.

TAFT Iran Map“Relations have always been bad, and they will continue to be bad,” Dr. Hossein Askari, Iran Professor of International Business and International Affairs at The George Washington University, told Oil & Gas 360®. “It’s just coming more into the open now.”

Askari served on the Executive Board of the International Monetary Fund, Special Advisor to the Minister of Finance of Saudi Arabia and as a consultant to the OECD, the World Bank, the IFC, the U.N., the Government of Saudi Arabia, and a number of multinational corporations. Askari has also acted as a mediator between the governments of Iran and Saudi Arabia, along with Iran and Kuwait.

“Cooperation on oil was meant to be the cornerstone for better relations between Iran and Saudi Arabia,” Askari said of efforts to rebuild diplomatic relations between the two Middle Eastern countries. “But I don’t see any chance for cooperation in the future.”

While official ties being cut may not be the sign of a wholly new paradigm between Saudi Arabia and Iran forming, it does have the potential to start something more wide-reaching, said Askari. “This could be a spark that leads to a much bigger conflict. If the U.S. gets involved, it could be much worse than past wars because of the size of the conflict.”

Investment may be harder to come by than Iran realizes

Iran hopes to bring its oil production back to pre-sanction levels following the implantation of an international deal regarding its nuclear program. Iran is targeting production levels of 5 MMBOPD, a goal that could take nearly $280 billion in foreign investment to achieve.

The increased supply from Iran amid a global glut in crude oil could keep oil prices depressed for longer as crude demand continues to play catch-up with supply, but Askari believes Iran’s investment goals could be overly ambitious.

“Iran is dreaming that everyone is rushing to invest there,” he said. “It will take time. People may want to sell them things, but anyone looking at long-term investment there should have their head checked.”

Oil prices are still not reflecting the potential for disruptions

A report released by Stifel today noted that “oil prices enter the new year reflecting little, if any, premium for potential supply disruptions,” although the souring relations between Iran, Saudi Arabia and the kingdom’s regional allies could alter oil market fundamentals.

Stifel maintained their outlook for oil prices, saying the market is likely to remain oversupplied for the balance of the year, but added that the heated rhetoric between Iran and Saudi Arabia could shift investor focus away from the glut temporarily, and could be a wildcard in world supply if the battle between the two escalates beyond one for market share.

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