Oil has found a new messiah for escaping from the present downward scoop- political tension between Saudi Arabia and Iran. After staying for a considerable period around the somewhat ‘new low normal’ of near $ 35, Brent- the most quoted index has resurged to $38.8 in the first New Year trading day.
Escalation of tension between the two largest OPEC producers will definitely cause upward price pressure; bringing joy to both countries.
So far, trends reveal that market is following the tension so intensively apart from anything else and it may control price movement in the immediate future.
Both Suadi Arabia and Iran were muscling in Yemen throughout last year and the active conflict between the two erupted after the execution of a Shiite cleric by Saudi Arabia. Iran warned a divine retaliation. Saudi severed diplomatic ties with Iran in response.
Both countries exert control over the Persian Gulf region which is the major transit route for oil supplies. A potential conflict may disrupt supplies.
So far, the OPEC and its price leader – Saudi Arabia were keeping supply high. This was like a policy of price war aimed to create uneasy breath for the new producers outside the cartel- especially the US Shale firms.
The latest conflict has added power to the crude producers and its impact may lead crude to rise to near $50s; where many analysts see undeclared collusion may reach between OPEC and non-OPEC producers.