War Between Saudi Arabia And Iran Could Send Oil Prices To $250

Submitted by James Stafford via OilPrice.com,

The rift between Saudi Arabia and Iran has quickly ballooned into the worst conflict in decades between the two countries.

The back-and-forth escalation quickly turned the simmering tension into an overt struggle for power in the Middle East. First, the execution of a prominent Shiite cleric prompted protestors to set fire to the Saudi embassy in Tehran. Saudi Arabia cut off diplomatic relations and kicked out Iranian diplomatic personnel. Tehran banned Saudi goods from entering Iran. Worst of all, Iran blames Saudi Arabia for an airstrike that landed near its embassy in Yemen.

Saudi Arabia’s Sunni allies in the Arabian Peninsula largely followed suit by downgrading diplomatic ties with Iran. However, recognizing the dire implications of a major conflict in the region, most of Saudi Arabia’s Gulf State allies did not go as far as to entirely sever diplomatic relations, as Saudi Arabia did. Bahrain, the one nation most closely allied with Riyadh, was the only one to take such a step.

Many of them are concerned about a descent to further instability. Nations like Kuwait and Qatar have trade links with Iran, plus Shiite populations of their own. Crucially, Qatar also shares a maritime border with Iran as well as access to massive natural gas reserves in the Persian Gulf. These countries are trying to split the difference between the two belligerent nations in the Middle East. "The Saudis are on the phone lobbying countries very hard to break off ties with Iran but most Gulf states are trying to find some common ground," a diplomat from an Arab country told Reuters. "The problem is, common ground between everyone in this region is shrinking."

The effect from the brewing conflict on oil is murky, but for now it is not having a bullish impact. In the past, geopolitical tension in the Middle East, especially involving large oil producers, would add a few dollars to the price of oil. This risk premium captured the possibility of a supply disruption into the price of a barrel of crude. However, recent events barely registered in oil trading. That is because the global glut in oil supplies loom larger than any potential for a supply disruption. Oil dropped to nearly $30 per barrel on January 12 and oil speculators are not paying any attention to the tension in the Middle East.

Also, the conflict could simply manifest itself in an intensified battle for oil market share. Iran has put forth aggressive goals to ramp up oil production in the near-term. And Saudi Arabia continues to produce well in excess of 10 million barrels per day while discounting its crude in several key markets, particularly in Europe in order to box out Iran.

But what if the current “Cold War” between Saudi Arabia and Iran turned hot?

Saudi Arabia has a variety of reasons to not back down, not the least of which is the very real sense of being besieged on multiple fronts. An article in The New Statesman by former British Ambassador to Saudi Arabia, John Jenkins, clearly laid out the threats that Saudi Arabia sees around every corner: extremists at home; a growing Iran; toppled allies from the Arab Spring; low oil prices; and a fractured relationship with the United States. The nuclear deal between Iran and the West was confirmation on the feeling in Riyadh that it is becoming increasingly insecure.

Already the two rivals have engaged in proxy battles in Yemen and Syria, supporting opposite sides in those wars. A full on direct military confrontation would be something entirely different, however. It would have catastrophic consequences for oil markets, even when taking into account the current supply overhang. Dr. Hossein Askari, a professor at The George Washington University, told Oil & Gas 360 that a war between the two countries could lead to supply disruptions, with predictable impacts on prices.

“If there is a war confronting Iran and Saudi Arabia, oil could overnight go to above $250, but decline [back] down to the $100 level,” said Askari. “If they attack each other’s loading facilities, then we could see oil spike to over $500 and stay around there for some time depending on the extent of the damage.”

While not impossible, war is speculative at this point. Also, $250 and $500 per barrel are numbers pulled out of thin air, and may seem a bit sensationalist. But despite the glut in global oil production – somewhere around 1 mb/d – the margin from excess to shortage is thinner than most people think. OPEC is producing flat out and spare capacity is actually remarkably low right now. The EIA estimated that OPEC spare capacity stood at just 1.25 mb/d in the third quarter of 2015, the lowest level since 2008.

As a result, even though it remains a remote possibility, direct military confrontation between Saudi Arabia and Iran could well put oil back into triple-digit territory in short order.

Comments

[Tortuga]

What's the flight time to the royal whorehouse of a Persian nuc klee ar de vice, 3.7 seconds?

Hell, the laser guided nanoHFT's sell SELL would only just be beginning the frontrunning warmup when the slow motion microwave of the 2nd tier punched in the buy the dipguided buy the dip. Wash. Price of oil remains the same as the open.

[Village-idiot]

I might "Up-vote" your comment if you made any sense.

[libertysghost]

With the Sauds having it come at them from every angle...as the writer impressions...they are more inclined to agrivate that situation?  

Mor likely, the royal family will try to strike any deal they can to remain the puppet leaders they already are...who is pulling the strings is all they need to sort out in their minds I suspect.  

[Village-idiot]

The Saudis are using the oldest trick in the book, used by governments throughout history. Get involved in a war to:

try to boost the economy

try to distract the populace from domestic problems

raise the price of oil

Within the next 12-month the Saudi government will run out of foreign reserves and will have to cut back spending on social programs; perhaps even collect business and personal income tax.

This will certainly start a lot of domestic unrest which the Saudis don't want. By getting into a war the citizens are being prepped to accept cutbacks and, naturally, blame someone else for the problems.

[Able Ape]

Iran is smarter than THAT and besides, Persian women are beautiful, Iranian men have better things to do than getting shot and blown UP.....

[Village-idiot]

Just think. Venezuela needs oil at around $180/barrel in order to balance their budget.

$250 oil would mean that that "Worker's Paradise" would live again, making Sean Penn, Barbra Streisand and other socialists around the world very happy

[onmail1]

<-- Divide & Conquer

Same old western policy

[. . . _ _ _ . . .]

Welcome Back Qatar

excerpt from March 2015, (one day before the Yemen war) about oil prices.

"Have the Saudis (and other regional actors) been stockpiling oil in preparation for a war with Yemen? Have the Americans been stockpiling oil (while it is still cheap) knowing that war in Saudi is inevitable? Is war (the epitome of disaster capitalism) the only answer to save the American economy and the US shale industry? Will the destruction of Saudi infrastructure bring about a global surge in oil prices to the benefit of the USA (and, ironically, Russia) and to the detriment of China? What will happen to the US economy when oil hits $150/barrel, or more; and will it be enough to offset the petro-dollar arrangement? Will this bankrupt energy-dependant Europe?"

Is a bankrupt Europe the outcome or the plan? Make Europe need Ukraine and have Turkey interfere so that Caucasus terror becomes the new ISIS for Russia's war on terror. This encroachment will invariably continue until the bear runs out of territory, turns, and charges.

[hedgiex]

What a shallow spin.to talkk up Oil.  A big assumption that Oil Producers apart from OPEC are not under pressure of escalating deficits. As for OPEC, the cartel is holding. Really ? No worries, the sea lanes will be minimally disrupted by the Empire that cannot allow a vacuum as this also affect the Petro dollar flows. The Empire will do Putin a favor at even $100 oil ?