Oil Prices Could Rise If Middle East Gets Worse

Escalating tensions with Iran have led Saudi Arabia to officially cut diplomatic ties with Iran. In a new report, Macquarie analyst Vikas Dwivedi explains why these tensions could have a much larger impact on the oil market than people think.

What happened?
The catalyst for the elevated tensions between the two oil producers was Saudi Arabia’s weekend execution of 48 suspected al-Qaeda terrorists. Iranian officials were outspoken in opposition to the executions.

The executions drew aggressive backlash in Tehran, where protestors attacked the Saudi embassy. The attack provoked Saudi Arabia to cut all diplomatic ties with Iran. “The event has direct negative implications for any efforts to attain peace in the two primary Shia/Sunni hotspots, including Syria and Yemen, as well as the ongoing fight against ISIS,” Dwivedi explained.

Impact on oil dependent on timeframe
For oil investors, escalating tensions have very little near-term impact on the global crude oil supply glut that has driven prices to multi-year lows. However, in the medium term, Dwivedi sees these events as bearish for crude prices because they decrease the likelihood that OPEC will cooperate in stabilizing the global oil market anytime soon. In the long term, Dwivedi notes that the possibility of war between the two nations is potentiall an extremely bullish development for oil prices.
 

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Sometimes it doesn’t take much
According to Dwivedi, traders should not overlook the potential significance of these events, even if they do not have an immediate impact on the oil market. “Major wars in the past have been sparked by relatively small catalysts, which in hindsight, enabled broader, already prevalent antagonistic attitudes to boil over into major and often times, violent events,” he concluded.

The United States Oil Fund LP (ETF) USO and the WisdomTree Trust GULF have shown only modest reaction to the news, trading down between 2.0 and 3.0 percent to open the week.

Disclosure: the author holds no position in the stocks mentioned.