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Iran-Saudi Arabia tensions unlikely to hold oil prices boost

Iran-Saudi Arabia tensions unlikely to hold oil prices boost

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Date: 5 January 2016 18:22

Baku, Azerbaijan, Jan. 5

By Aygun Badalova - Trend:

The tensions between Saudi Arabia and Iran will unlikely provide a lasting boost to oil prices, analysts at British economic research and consulting company Capital Economics believe.

“Oil prices have risen, but not materially. Indeed, ample global stocks of crude and higher production elsewhere mean that geopolitical risks from the Middle East are not as great as they once were,” analysts said in a report obtained by Trend.

Relations between Saudi Arabia and Iran soured after the execution of a prominent Shia cleric Nimr al-Nimr in the Kingdom.

Iran strongly condemned the execution of Nimr al-Nimr, there were mass protests in the country, in particular, Saudi embassy in the capital Tehran and the consulate in the city of Mashhad were attacked.

Saudi Arabia broke off diplomatic ties with Iran on Jan 3.

Capital Economics’ analysts believe that the bulk of today’s weakness in global equities can be attributed to the negative headlines coming out of China, including a near-7 percent fall in the main Shanghai stock index.

They also noted that the impact of the surge in Middle East tensions on the oil price itself has been limited.

“Admittedly, the prices of the main crude benchmarks have risen by about 2-3 percent, but these are not big moves compared to those over the course of last year. What’s more, given that the previous slump in oil prices appeared to be having a negative impact on the global economy, or at least on investor confidence, a small increase may actually be welcomed by some,” analysts said.

Oil prices fell on Tuesday on concerns about the pace of economic growth in China and a stronger U.S. dollar, handing back some of the gains triggered by an escalation of tensions in the Middle East, according to Reuters.

Global benchmark Brent crude prices were down 17 cents at $37.05 a barrel at 1314 GMT. U.S. WTI crude slipped 7 cents to $36.69 a barrel.

Capital Economics’ analysts believe that while there are many doomsday scenarios resulting from a further escalation in Saudi-Iran tensions, none of these are actually at all likely.

“Iran has often threatened to disrupt the flow of oil through the Strait of Hormuz, but new pipelines and high global stocks have reduced the credibility of this threat. What’s more, the West would surely retaliate by extending its sanctions, rather than lifting them later this year as Iran hopes,” analysts said.

Alternatively, Iran or Saudi Arabia might step up the proxy conflicts being fought elsewhere in the region, but few of the countries involved (notably Syria) are major producers any more, according to the analysts.

“A renewed deterioration of the security situation in Iraq would be a bigger threat to supply, but we judge the additional risks here to be small. Indeed, there is also one good reason why a further escalation of tensions could lead to an extended period of lower oil prices: Saudi Arabia might now be even less willing to cut its own output to support oil prices if Iran would be a major beneficiary,” they added.

Overall, analysts believe that a sustained recovery in oil prices will have to depend on production cuts outside OPEC and on signs of stronger global demand.

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