Saudi v Iran: When Mideast Unrest *Clobbers* Oil Prices

"So what?" looks like this: oil price momentarily spiked after Saudi v Iran commenced, then resumed (downward) course.

We've gotten used to the idea that unrest in the Middle East results in a spike in oil prices worldwide. But, that may no longer be the case given current events. A few days ago, Saudi Arabia and Iran had a conflict culminating in the former severing diplomatic ties with the latter after the Saudis executed Shiite cleric Nimr al-Nimr and protests against the Saudi embassy in Tehran followed. Whether it's Saudi Arabia deliberately showing "who's boss" in the region after the US has become less bellicose towards Iran and its Shiite allies, we are more concerned here with the effect than the cause.

In terms of oil price, the result may be somewhat unexpected. After a brief spike in the aftermath of the aforesaid hostilities, the price of oil has actually fallen below the level it was before. To make a long story short:

• To begin with, the market is so massively oversupplied with oil that the immediate consequences of this diplomatic tussle are next to none; 
• Because these two large OPEC producers will likely not engage in military conflict (we hope), it is difficult to envision their production being materially affected;
• Instead, their combined production will probably increase since they will not coordinate their production levels even as major players in a so-called "cartel."

Already, we have rumors that Saudi Arabia is cutting oil prices charged to European customers to preempt Iranian exports there after international sanctions are lifted:

The latest price drop was caused by the escalation of tensions between Saudi Arabia and Iran in the wake of the execution of senior Shia Muslim cleric Nimr al-Nimr. While this briefly drove prices higher, the prevailing view became that it would prevent the powerful Opec cartel, of which both countries are members, from agreeing on production cuts to support higher prices. In fact, most experts think it is likely to make the situation much worse.

Iran is about to emerge from years of international sanctions and stands ready to bring 500,000 additional barrels of oil per day to a market already oversupplied to the tune of up to two million barrels. The country already has "customers lined up", especially in Europe, Dr Fereidun Fesharaki, a former oil adviser to the Iranian Prime Minister and now chairman of consultancy FGE, told The Times.

This is triggering a price war that is adding further weight to prices. Reports have emerged that Saudi Arabia is slashing prices for its crude in Europe to try and prevent its customers buying from Iran as the market becomes another forum for what has been dubbed an "economic war" between the two countries.

There was a time when OPEC mattered and, more to the point, conflicts among OPEC members mattered. Iran v Iraq, Iraq v Kuwait, etc. are the stuff of legend. Those days are behind us now in a "free-for-all" environment where the mother of all cartels seems to have run its course and outlived its original purpose. Cartel or not, it's every producer out for itself.