Oil prices jumped on the first trading day of 2016 as Middle East tension outweighed a selloff in financial markets around the world.
Oil markets remain oversupplied and depressed, but geopolitical flash points have a historical tendency to disrupt market trends. Over the weekend, Saudi Arabia carried out a mass execution of 47 prisoners, including a prominent Shiite cleric Nemer al-Nemer. The executions prompted condemnations from around the world, but in Iran protestors threw Molotov cocktails at Saudi Arabia’s embassy, setting fire to the building. Iran’s Supreme Leader Ayatollah Ali Khamenei said that Saudi Arabia would face “divine retribution” for executing the Shiite cleric.
In response, Saudi Arabia cut off diplomatic ties with Iran, and kicked out its diplomats. Saudi allies in the Persian Gulf also downgraded diplomatic relations with Iran.
The conflict between Iran and Saudi Arabia has simmered for months, with the wars in Yemen and Syria playing out as proxy fights between the two rivals. Now the conflict has erupted into a more direct standoff. The execution of al-Nemer “risks to be really explosive in the broader region” a senior Western diplomat told The Wall Street Journal.
The U.S. government, which has sought to lower the temperature between the two countries in 2015 and bring Saudi Arabia on board with the nuclear agreement it brokered with Iran, called on both sides to take “affirmative steps to calm tensions” following this weekend’s events.
Oil prices briefly jumped on Monday, with WTI up more than 3 percent and Brent up more than 4 percent in early trading hours. Both benchmarks spiked above $38 per barrel. That is a long way from the $100 per barrel routinely seen in years past when Middle East tension spooked oil markets, but prices were up from the 11-year lows seen in December.
The significant price increase came even as global financial markets saw turmoil on the first trading day of the New Year. U.S. stock indices plunged 2 percent on January 4, following negative economic news coming out of China. New data showed that China’s factory activity slowed in December, sending the Shanghai Composite down by 7 percent. Trading came to a halt to prevent a further selloff.
The episode conjured up bad memories of the summer of 2015, when China suffered several weeks of a stock market meltdown. The economic fissures have not healed in the meantime, and the factory data from December points to ongoing sluggishness in China. The slowing economy could force a further depreciation of the yuan, which in turn will depress China’s oil demand. This stands out as a bearish black swan for crude markets in the coming months.
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Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1