Wednesday, April 24th, 2019

Will the Saudi – Iranian Fight Drive Oil Prices Up?

 

If you are trading options on oil futures what do you expect from 2016? Many believed that there might be a slow recovery in oil prices as the world economy mended. Now the situation in the Middle East between Saudi Arabia and Iran threatens to drive the price of oil sky high. Will the Saudi Iranian fight drive oil prices up? Here are a few thoughts on the subject. Starting with CNN there is the view that while the conflict could send oil prices skyrocketing, it probably won’t because the parties involved are not that stupid.

In recent days, tensions have dramatically increased between the two countries. Together, Iran and Saudi Arabia hold one-quarter of the planet’s proven oil reserves and until a few years ago such a conflict would have sent oil prices skyrocketing.

“You cannot afford to disrupt oil supply from this part of the world — for any period of time,” said Fidel Gheit, Oppenheimer’s senior oil and gas analyst.

So why aren’t oil traders worried silly about this confrontation?

Because few believe a shooting war between Saudi Arabia and Iran will actually start.

The fact that there is currently an oversupply of crude oil would soften the effects of any Iranian Saudi conflict but would not keep prices from rising. Will the Saudi Iranian fight drive oil prices up? It depends on how bad things get and if production is hurt as opposed to threatened.

What Is the Saudi Iran Feud All About?

Iran and Saudi Arabia are rivals in the Middle East. Both are geographically large nations with a lot of oil. The two account for 20% of proven global reserves. Both nations vie for influence in the Middle East. Saudi Arabia has a largely Sunni Muslim population while Iran is large Shiite Muslim. These two sects of Islam compete, often violently, for control of the Islamic world. With this as a background it is easy to see how Iranians were angered when Saudi Arabia executed a Shiite Muslim cleric whom they convicted of attempting to overthrow the Saudi government. The New York Times reports how a crowd ransacked the Saudi embassy in Tehran.

Iranian protesters ransacked and set fire to the Saudi Embassy in Tehran on Saturday after Saudi Arabia executed an outspoken Shiite cleric who had criticized the kingdom’s treatment of its Shiite minority.

The cleric, Sheikh Nimr al-Nimr, was among 47 men executed in Saudi Arabia on terrorism-related charges, drawing condemnation from Iran and its allies in the region, and sparking fears that sectarian tensions could rise across the Middle East.

The executions coincided with increased attacks in Saudi Arabia by the jihadists of the Islamic State and an escalating rivalry between the Sunni monarchy and Shiite Iran that is playing out in conflicts in Syria, Yemen and elsewhere. Sheikh Nimr was an outspoken critic of the Saudi monarchy and was adopted as a symbolic leader by Shiite protesters in several Persian Gulf countries during the Arab Spring uprisings.

The Saudi government and several other Sunni Muslim governments in the region have reduced or cut diplomatic and commercial ties with Iran. It remains to be seen if events will spiral out of control into armed conflict. It would not take much of a threat to close the Strait of Hormuz through which moves twenty percent of all traded oil in the world according to National Geographic.

This image shows why the region is important and why a Saudi Iranian fight could drive the price of oil up.

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