OPEC Tension Turns Around Oil
Alvexo | Jan 04, 2016 10:40AM ET
Turbulence inside OPEC has sparked the latest round of oil volatility, with the first 2016 trading session opening to a quickly rising price of crude due to a diplomatic spat between Iran and Saudi Arabia. The Saudi execution of influential Shiite Cleric Nimr al-Nimr spurred a riot in Iran that resulted in the Embassy in Tehran being stormed and burned; and a statement from the Iranians condemning the action and threatening dire consequences. Iran’s Supreme Leader Ayatollah Ali Khamenei, a Shiite like al-Nimr, clearly stated that revenge against the Saudi politicians responsible for the execution would be sought. Despite these strong comments, Iranian President Hassan Rouhani took a more muted stance, clearly in consideration of the potentially dire economic threats to both countries should tensions be further inflamed. The Saudi reaction to their destroyed Embassy was to cut diplomatic relations with Iran and issue a 2-day window for the Ambassador to exit the country safely. The events saw the Brent rise to $38.39 and WTI jump to $38.27 during early trading hours.
The near-term pressure on oil prices is still recognized as the trend, and a recent forecast concerning boosted crude orders from China and estimates of increased demand in 2016 fail to put sufficient doubt on momentum’s strength. Analysts are estimating the next reported expansion of crude oil orders from China to be 8.00%, hitting 7.20 million barrels per day with the potential to grow further. Production is continually increasing as evidenced by recent numbers from countries that have overshot output goals like the USA and Russia, with the latter hitting 10.83 million barrels a day in late 2015. With the now decreased communication between the fifth and first largest producers in OPEC, and the former’s intention to vastly increase output, the horizon on prices is looking grey. Poorly performing emerging economies and a mediocre manufacturing PMI in China complicate the picture; with the latest and tenth consecutive decline in the statistic printing at 48.2.
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