Bjarne Schieldrop Crude oil comment – The increasing Saudi Iran tension. Lifting of sanctions at risk?

SEB - Prognoser på råvaror - CommodityCrude oil price action – Middle East tension not enough (yet)

Brent crude oil experienced intraday volatility yesterday on the back of Saudi – Iran tension where it moved up as much as 4.6% to $38.99/b before it moved back down to close the day with a loss of 0.2% at $37.22/b. Thus in the end of the day the increasing Saudi – Iran tension was not enough to lift the oil price yesterday. While the risk in the Middle East has increased it is not yet specifically threatening and impacting supply enough to warrant a higher oil price amid bearish fundamentals. The most immediate risk from the increased Saudi – Iran tension is probably the lifting of the Iran sanctions. If they are not lifted as planned, Iran would not be able to increase exports in 2016 as widely expected. Notable yesterday was that the longer dated Brent Dec-19 contract lost 0.7% to close at $55.3/b while the front end as noted above only lost 0.2% on the day.

The increasing Saudi – Iran tension. Lifting of sanctions at risk?

While the Saudi Arabian Shiite cleric Nimr al-Nimr was sentenced to death already in 2014, the timing of his execution last Saturday is notably close in time with the rapidly approaching lifting of the Iran sanctions. According to Reuters the Iran sanctions could possibly be lifted as early as next week. Protesters in Tehran stormed the Saudi embassy following the execution. This clearly brings back the dramatic memories of the storming of the US embassy in Tehran in 1979 followed by a 444 day hostage crisis. The execution of the cleric has clearly taken place at a very sensitive time for Iran just ahead of the probable lifting of international sanctions and thus just before Iran is set to re-enter as a normal member of the global community. The execution was perceived as a strong provocation in Iran which then led protesters there to storm of Saudi’s embassy in Tehran and set it on fire. While Iran now has increased security around the embassy and arrested 40 protesters, the damage has been done. Diplomatic ties between Iran and Saudi Arabia are now broken with also Bahrain and Sudan doing the same while US politicians’ memories from 1979 has been revived. The Sunni – Shiite divide has now become much deeper with possibly more intense proxy wars in Yemen and Syria. The risk picture in the Middle East has clearly inched higher. The most immediate issue at risk is the lifting of the Iran sanctions. While we still expect the sanctions to be lifted the latest events have definitely created some last minute risk that things may not move in the direction widely expected. If the sanctions are not lifted as planned it would clearly reduce the projected crude oil surplus for 2016.

Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking

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