Oil prices rise on Saudi Arabia, Iran tensions

Global oil benchmark Brent climbed more than a dollar to a high of $38.50 per barrel on January 4

Photo for illustrative purpose only.
Photo for illustrative purpose only.

Oil prices surged during the start of 2016 trading as relations between top oil producers Saudi Arabia and Iran deteriorated, raising concerns about potential supply disruptions, Reuters reports.

Saudi Arabia, the world's biggest oil exporter, cut diplomatic ties with Iran on Sunday in response to the storming of its embassy in Tehran. The diplomatic row between the two major oil producers escalated following Riyadh's execution of a prominent Shi'ite cleric on Saturday.

Global oil benchmark Brent climbed more than a dollar to a high of $38.50 per barrel on Monday, before easing back to $38.10 at 0350 GMT, still up by over 2%.

Oil traders said the crisis between Saudi Arabia, also the world's second-largest oil producer, and Iran, which holds some of the largest proven oil reserves, was pushing up prices.

The clash between the two Middle Eastern rivals also comes as Iran hopes to ramp up oil exports following the expected removal of sanctions against it after reaching a deal over its alleged nuclear weapons development programme.

‘With increased geopolitical tensions between Saudi Arabia and Iran, the market has put a premium on prices just when markets opened (in 2016)’, brokerage Phillip Futures told Reuters on Monday.

Despite Monday's jump, oil prices are down by two-thirds since mid-2014 on ballooning oversupply as producers including the Organisation of the Petroleum Exporting Countries (OPEC), Russia and the United States pump between 0.5mn and 2mn barrels of oil every day in excess of demand.

‘OPEC, Russia and the US beat our initial supply expectations, adding to an existing inventory headwind. For 2016 we think of it as the market rebalancing year, but only from H2 2016’, Alliance Bernstein said.

‘Next year will be the year of undersupply which means we should see at least an eighteen month bull market from the middle of this year’, it added.

Iran plans to raise output by half a million to 1mn barrels per day (bpd) post-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 1mn bpd, down from a peak pre-sanctions peak of almost 3mn bpd in 2011.
In Russia oil output hit a post-Soviet high in 2015, averaging 10.73mn bpd.

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