Oil Soars on Souring Middle East Diplomacy

Market Trends - 04/01/2016

Oil prices surged at the onset of the 2016 reopening amid a few factors, the most important being rising tensions between the Organization of Petroleum Exporting Countries’ first and fifth largest producers, Saudi Arabia and Iran. On Saturday, Saudi Arabia executed Shiite Cleric Nimr al-Nimr, leading Iranian protestors to attack the Saudi embassy in Tehran, setting it on fire. Iran’s Supreme Leader Ayatollah Ali Khamenei warned of the consequences, remarking that the “the divine hand of revenge will take the Saudi politicians by the throat.” By contrast, Iranian President Hassan Rouhani suggested he did not want to inflame tensions beyond current levels. As a result of the attack against the Saudi Embassy, the nation swiftly moved to cut diplomatic ties with Iran on Sunday, with Saudi Arabia’s Foreign Minister Adel al-Jubeir giving Iran’s Ambassador a deadline of 48-hours to leave the country. News of the decision sparked an early rally in Brent, with the benchmark jumping to $38.39 while West Texas Intermediate echoed the moving, rising to $38.27.

A further push to recent price rally are expectations for an increase in China’s annual crude imports. Analysts are currently predicting an import expansion of 8.00% to 7.20 million barrels per day. Morgan Stanley in particular has stated that there is a potential for oil demand grow by the end of 2016, narrowing the global glut and potentially leading to an adjustment higher in expectations despite the fact that prices could still fall further in the near-term. The statement was supported in part by rising OPEC output combined with Russia and the United States beating oil production estimates. Russian oil production rose to 10.83 million barrels per day in December, a post-Soviet record.  Meanwhile, Iran is planning to raise output once sanctions are lifted. Fears for demand arise though as emerging markets appear to be slowing down. Markit reported a decline in the Caixin Manufacturing Purchase Manager’s Index for the world’s biggest commodity consumer, China, printing in contraction at 48.2 for the month of December, marking 10-straight months of contraction as manufacturing spare capacity grows.



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