NEW YORK CITY – Oil prices increased on Monday after a breakdown in diplomatic ties between Saudi Arabia and Iran that some speculated could result in supply restrictions, Reuters reported.
Saudi Arabia cut diplomatic ties with Iran on Sunday in response to the storming of its embassy in Tehran following Riyadh’s execution of a prominent Shi’ite cleric on Saturday. Bahrain said it would cut ties with Iran, too.
Benchmark Brent crude futures were last up 76 cents on the day at $38.04/bbl, near an intraday high of $38.50. US West Texas Intermediate futures were up 48 cents at $37.52.
“The two questions the market is grappling with are - where next in the Saudi Arabia/Iran stand-off? I think President (Hassan) Rouhani on the Iranian side would like to calm things down and push for no further escalation,” Energy Aspects analyst Richard Mallinson was quoted to say. “The second question for the market is there any uncertainty over the exact timing and volume of the return of Iranian barrels?”
The clash between the two Middle Eastern countries comes as Iran, which holds some of the largest proven reserves, hopes to ramp up oil exports following the expected removal of sanctions against it.
A series of Iranian officials vowed on Friday to expand Tehran’s missile capabilities, a challenge to the US which has threatened to impose new sanctions even as the vast bulk of its measures against Iran are due to be lifted.
“It’s very confrontational. I don’t think that’s enough to derail (the broader lifting of sanctions), but it is prompting a few more questions about what would the timing of the return of Iranian barrels look like,” Mallinson was quoted to say. “The statements at the weekend by (Iranian oil officials) that Iran would only increase production at the level of the market can absorb seems to be a shift in rhetoric.”
Iran plans to raise output by half a million to 1 MMbbl post lifting of sanctions, although Iranian officials said they did not plan to flood the market with its crude if there was no demand for it.
Iran’s oil exports have fallen to around 1 MMb/d, down from a peak pre-sanctions peak of almost 3 MMb/d in 2011.
“Iran may decide to take more of a hardline stance against the Saudi-oriented policy of not cutting production. So far, they’ve been going along with it, but this renewed political vigor may prompt them to change a bit,” CMC Markets analyst Jasper Lawler was quoted to say. “Really, this is still a bear market and people are just selling the bounce because (the clash) is not going to affect production. Obviously it’s just tensions in the region.”
Oil prices are still down by two-thirds since mid-2014 on oversupply as producers including OPEC, Russia, and the US pump between 0.5 million and 2 MMb/d in excess of demand.
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