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US Foreign Policy (Dr. El-Najjar's Articles)
Saudi-Iranian Dispute Won't Cause Lasting Oil
Al-Jazeerah, CCUN, January 11, 2016
Oil prices jumped on the first trading day of 2016 as Middle
East tension outweighed a selloff in financial markets around the world.
Oil markets remain oversupplied and depressed, but geopolitical
flashpoints have a historical tendency to disrupt market trends. Over the
weekend, Saudi Arabia carried out a mass execution of 47 prisoners,
including a prominent Shiite cleric Nemer al-Nemer. The executions
prompted condemnations from around the world, but in Iran protestors
threw Molotov cocktails at Saudi Arabia's embassy, setting fire to the
building. Iran's Supreme Leader Ayatollah Ali Khamenei said that Saudi
Arabia would face "divine retribution" for executing the Shiite cleric.
In response, Saudi Arabia
cut off diplomatic ties with Iran, and kicked out its diplomats. Saudi
allies in the Persian Gulf also downgraded diplomatic relations with Iran.
The conflict between Iran and Saudi Arabia has simmered for
months, with the wars in Yemen and Syria playing out as proxy fights
between the two rivals. Now the conflict has erupted into a more direct
standoff. The execution of al-Nemer "risks to be really explosive in the
broader region" a senior Western diplomat told The Wall Street Journal.
The U.S. government, which has sought to lower the temperature
between the two countries in 2015 and bring Saudi Arabia on board with the
nuclear agreement it brokered with Iran,
called on both sides to take "affirmative steps to calm tensions"
following this weekend's events.
Oil prices briefly jumped on
Monday, with WTI up more than 3 percent and Brent up more than 4 percent
in early trading hours. Both benchmarks spiked above $38 per barrel. That
is a long way from the $100 per barrel routinely seen in years past when
Middle East tension spooked oil markets, but prices were up from the
11-year lows seen in December.
The significant price increase came
even as global financial markets saw turmoil on the first trading day of
the New Year. U.S. stock indices
plunged 2 percent on January 4, following negative economic news
coming out of China. New data showed that China's factory activity slowed
in December, sending the Shanghai Composite down by 7 percent. Trading
came to a halt to prevent a further selloff.
The episode conjured
up bad memories of the summer of 2015, when China suffered several weeks
of a stock market meltdown. The economic fissures have not healed in the
meantime, and the factory data from December points to ongoing
sluggishness in China. The slowing economy could force a further
depreciation of the yuan, which in turn will depress China's oil demand.
This stands out as a bearish black swan for crude markets in the coming
In fact, global economic forces, along with oil supply and
demand fundamentals, are much more important than the tension between Iran
and Saudi Arabia. Unless the conflict escalates in a significant way, the
supply overhang will continue to be much more influential on the price of
oil than the war of words between Tehran and Riyadh. After spiking early
on January 4, crude fell back by the afternoon as the markets digested the
bearish news from China.
Moreover, the Saudi-Iran conflict could
merely play out in the oil markets. OPEC was already unlikely to agree to
a common strategy that would see production cuts, but now everyone can
essentially rule out any cooperation between Saudi Arabia and Iran. Both
countries may try to ramp up production (Iran plans on doing that anyway
when sanctions are lifted) and discount their oil in an effort to claw
away market share from each other.
Meanwhile, the first shipment
of U.S. oil
left American shores this week. ConocoPhillips and NuStar Energy were
the first to export oil from the Eagle Ford. The large oil-trader Vitol
Group purchased the shipment. Oil exports from the U.S.
won't come in large volumes since WTI and Brent are trading at parity.
But the capacity to export will put some downward pressure on the
internationally-oriented Brent benchmark.
In other words, global
economic weakness and the glut in oil supplies will continue to weigh on
crude. At this point, only tension in the Middle East is providing a bit
of a lift to oil markets, but even that won't be enough to push up prices
in any lasting way.
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