Market fundamentals driving oil for now, analysis finds

Markets now, geopolitical tensions later, review of oil price dynamics finds.
By Daniel J. Graeber  |  Jan. 6, 2016 at 9:25 AM
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LONDON, Jan. 6 (UPI) -- The glut of oil on the global market is diminishing the prospects that tensions between Iran and Saudi Arabia will cause a spike in oil prices, analysis finds.

Crude oil prices spiked Monday amid the diplomatic backlash that resulted when the Saudi Embassy in Tehran was stormed by activists frustrated by Riyadh's execution of prominent Shiite cleric Nimr al-Nimr. Several of Saudi Arabia's allies in the region have cut or downgraded ties with Iran in what may be one of the more severe geopolitical escalations between the two rivals in decades.

Oil prices since Monday, however, have moved lower, with Brent trading at its lowest level in more than a decade. An emailed forecast from analysis group Wood Mackenzie said market fundamentals, not geopolitical tensions, are the driving force behind crude oil prices.

"At this point, the increased tensions between the regional powers of Saudi Arabia and Iran have limited direct impact on the oil market supply and demand fundamentals," it found.

Iran and Saudi Arabia are both key figures in the Organization of Petroleum Exporting Countries. Rumors circulating in December suggested OPEC members could adjust production levels to accommodate the eventual return of Iran, though ministers gathered in Vienna issued only vague references to formal quotas.

Saudi Arabia has maintained it needs to keep production robust in order to satisfy an expected return of demand.

Crude oil prices started moving lower in mid-2014 as U.S. crude oil production started to rival that of Saudi Arabia's. According to OPEC, Saudi Arabia produces around 9.7 million barrels of oil per day. For the week ending Dec. 24, total U.S. crude oil production was 9.2 million bpd, a 0.8 percent increase over the same week in 2014.

Wood Mackenzie said renewed tensions between Iran and Saudi means any chance for an agreement to cut production has all but evaporated, meaning supply-side pressure will continue to put downward pressure on crude oil prices.

Moving forward, however, output from the United States and other non-OPEC producers could diminish under the strain of lower crude oil prices. Demand, meanwhile, should increase, albeit slowly, as major economies continue to distance themselves from recession.

"With this tightening in the supply and demand balance, political risk will become more important to oil prices," the report from Wood Mackenzie found.

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