Oil prices rise over supply cut speculations

MIDDLE EAST FACTOR: It is still unknown if the diplomatic spat between Saudi Arabia and Iran over the execution of a cleric could trigger production cuts. Oil prices have slumped since the middle of 2014 due to oversupply.


    Jan 05, 2016

    Oil prices rise over supply cut speculations


    OIL prices edged up yesterday, after a breakdown in diplomatic ties between Saudi Arabia and Iran that some speculated could result in supply restrictions, although gains were tempered by data showing some of Asia's largest economies are struggling.

    Saudi Arabia, the world's biggest oil exporter, cut diplomatic ties with Iran on Sunday in response to the storming of its embassy in Teheran following Riyadh's execution of a prominent Shi'ite cleric on Saturday.

    Fellow Gulf producer Bahrain said yesterday it too would cut ties with Iran.

    Benchmark Brent crude futures were last up 76 US cents on the day at US$38.04 a barrel at 11.15am GMT, near an intraday high of US$38.50.

    United States West Texas Intermediate futures were up 48 US cents at US$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 said.

    "The second question for the market is is there any uncertainty over the exact timing and volume of the return of Iranian barrels?" he said.

    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 Teheran'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.

    Iran plans to raise output by half a million to 1 million barrels per day (bpd) after the 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 million bpd, down from a peak pre-sanctions peak of almost 3 million bpd in 2011.

    The oil price surrendered earlier gains that boosted futures by as much as 2 per cent, after data showed Chinese factory activity shrank for a 10th straight month, prompting a 7 per cent fall on Chinese stock markets and for trading to be suspended.

    Oil prices are still down by two-thirds since mid-2014 on oversupply as producers including the Organisation of the Petroleum Exporting Countries, Russia and the US pump between 0.5 million and 2 million barrels of oil every day in excess of demand.