Oil prices pare gains after jumping on Iran-Saudi Arabia tensions

London (Jan 4)  Growing tension between Saudi Arabia and Iran caused oil prices to jump in the first trading session of 2016, an early sign of how the unstable political situation in the Middle East could complicate the outlook for oil prices in 2016.

Prices pared gains in the early part of the European trading day, but both major international crude benchmarks managed to cling to solid advances.

West Texas Intermediate CLG6, +1.13%  rose more than 3% in Asian trade, but was up 47 cents, or 1.3%, at $37.51 mid-morning in Europe. Brent LCOG6, +1.80% was up 69 cents, or 1.8%, to $37.87 a barrel.

The advances came after Saudi Arabia on Sunday severed diplomatic ties with Iran, a fellow member of the Organization of the Petroleum Exporting Countries. The Saudi move came as hundreds of Iranians protested against the kingdom’s Saturday execution of Nemer-al-Nemer, a prominent Shiite cleric.

Read: Saudi Arabia-Iran rift could further disrupt oil prices

The tension between two major producers is adding to the unpredictability of oil prices, which slumped to multiyear lows in 2015 amid a supply glut. Expectations for more barrels coming on stream from Iran this year were a key factor in oil’s tumble, after an international agreement over its nuclear program paved the way for an expected end this year to Western sanctions on buying its oil.

Iran, the No. 3 oil producer in the Middle East, last year said it planned to increase its oil exports by at least 500,000 barrels once sanctions were lifted.

Shiite cleric Nemer al-Nemer was among 47 people executed in Saudi Arabia on Saturday. The execution sparked protests around the globe.

Iran’s expected production ramp-up, coupled with the determination of other producers like Saudi Arabia and Russia to keep output high, has spurred fears that the excess of crude would weigh on prices again this year. Oil could fall as low as $20 a barrel before producers start making significant production cuts, Goldman Sachs forecast last month.

But an escalation of tensions between two of the Middle East’s key regional powers could delay any further slide in prices.

“Any clash between two key oil producers and possible supply chain disruption will always create some psychological reaction on prices,” said Gao Jian, an energy analyst at Guangzhou, China-based SCI International. “But a bigger reason why prices rose higher today is the rising uncertainty over how this conflict might affect the expected lift of sanctions on Iran. Any possibility of a delay or a cancellation of the ban lift will be positive to oil prices.”

The deterioration in Saudi-Iranian relations could also deepen fissures over oil policy within OPEC, whose member countries produce about a third of the world’s crude.

Natural gas NGG16, -1.07%  slumped 3.1% to $2.26 per million British thermal units on Monday, while gasoline RBG6, +2.06%  rose 2% to $1.30 a gallon.

Source: MarketWatch