In a normal oil market any geopolitical tension in the Middle East would immediately translate into supply concerns and a jump in oil prices. However, the recent diplomatic row between Iran and Saudi Arabia did not lead to a sustained oil rally this time and may even mean lower prices in the near future. Concerns over a slowing Chinese economy and the global oil supply glut kept usual fears of a supply shock fairly muted. At the same time, rivalry between the two largest OPEC producers may even lead to increased supply.
Last week Saudi Arabia executed 47 people accused of terrorism. Among them was a prominent Shia cleric and opponent of the Saudi monarchy –Sheikh Nimr al-Nimr. Following the execution of Nimr al-Nimr protesters in Tehran attacked the Saudi embassy and set it on fire. In response, Riyadh cut diplomatic ties with Iran. In an exclusive interview with Reuters, Saudi Foreign Minister Adel Al-Jubeir accused Iran of plotting against the Kingdom and stated that Saudi Arabia has intentions to end air traffic and trade links with the Islamic Republic of Iran. In the same interview Al-Jubeir also indicated that Riyadh was willing to impose a travel ban against people traveling to Iran. As events were unfolding Kuwait, Sudan, United Arab Emirates, Djibouti, Somalia, and Bahrain also cut their diplomatic ties with Iran and expressed their support for Saudi Arabia.
These tensions are adding to the existing Saudi-Iran power rivalry and proxy wars in Syria and Yemen. However, statements from both Iran and the Saudi Arabia do not seem to indicate a high chance of a direct military confrontation. Therefore, without direct threat to oil production in the region, global oil supplies will remain uninterrupted. With Saudi Arabia’s earlier decision to flood the oil market in order to drive out high-cost producers, this means only one thing – more oil.
Furthermore, recent tensions may spur Saudis to undermine OPEC production cuts or even increase production in order to hurt Iran’s economy. Thus, new geopolitical tensions can surprisingly result in lower oil prices. Given that the Iran-Saudi confrontation remains diplomatic in nature prices for oil will remain low with the possibility of a deeper slump.