The rising tension among Saudi Arabia and Iran, two Middle East countries who are major producers of crude oil, could push prices down even further amid the prolonged oil glut and uncertainty of their conflict, but have remained unchanged so far.
The persistent oil global surplus remains a significant issue among their squabble as the markets reacted slowly when prices of oil on Monday briefly rose higher than $38 a barrel, but withdrew back down to $36 a barrel on Tuesday. On Sunday, Saudi Arabia declared it would end all their ties with Iran.
Oil prices are expected to sink even lower with the lifting of the sanctions imposed on Iran since the added supply will only overwhelm an “already oversupplied market,” said Tony Starkey, an energy analysis manager for Bentek Energy, the Denver- based unit of Platts, an energy and metals data provider. The latest tensions between the two countries could change that outlook and have the “potential to stir up violence and conflict that could disrupt oil trade routes and supply, which would be bullish for prices,” he said.
The “dust-up” between the Saudi Arabia and Iran should not have much of an impact, but it has generated doubt, said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business in Dallas.
“Unless those two countries go to war or try to disrupt each other’s oil flow I can’t imagine it will have much of an impact on oil prices down the road,” he said.
Prices at gas pumps across the country are averaging $2.00 a gallon in many states, according to Gasbuddy.com. The lowest price is in Missouri where gasoline prices are $1.70 a gallon and the highest price is in California at $2.89 a gallon.
The Energy Information Administration, the independent statistical arm of the Department of Energy based in Washington, D.C., estimates that gasoline will average $2.36 per gallon in 2016.
Prices could see an even steeper drop if both countries attempt to undermine each other by ramping up and “producing as much oil as they can,” Weinstein said.
“Obviously, the Saudis can produce oil at a fiscal loss much longer than the Iranians can, but I don’t know if they will pursue that strategy or not,” he added.
The outcome in a break in diplomatic relations could be difficult to predict since Saudi Arabia produces 9 million barrels a day and is the number one oil producing country with 10% of the overall global production followed by the U.S. which produces 9%, he said.
The global surplus of 2 million to 2.5 million excess barrels of oil means consumers will not have to be concerned about prices reversing its course anytime soon.
“We will have bargain basement gasoline prices for the next couple of years,” Weinstein said. “It’s hard to envision oil rising above $2.50 a gallon for the next couple of years.”
The unease in the Middle East will increase volatility in pricing only for the short-term because of the ambiguity, said Rob Thummel, a portfolio manager with Tortoise Capital in Leawood, Kansas which has $13.5 billion under management invested in energy stocks.
“Oil prices are delicate and the margin error is low since there is no geopolitical risk premium built into the price, but it depends on how much the conflict escalates,” he said.
With a 30-day supply of crude oil, inventories are high and the conflict should “blow over,” Thummel said. The production of oil in the Middle East is not impacted even if tensions are higher for a short period. If production rises, consumers will benefit and see another drop in gasoline prices, he said.
“It will be great for consumers because gasoline prices will remain at $2.00 a gallon for a while,” Thummel said.
The latest escalation is not an “event” and will not move the needle on prices even if it is a precursor to one, said Chris Faulkner, CEO of Breitling Energy, a Dallas oil and gas exploration and production company.
A reduction in the reserves of oil is imminent since the world is consuming about 96 million barrels of oil per day and the amount of the supply is ahead of that by 750,000 barrels, he said. If the US reduces the amount by 500,000 barrels by this spring, then we have almost “eliminated all the spare which puts us on very thin margin with such tensions building in the Middle East,” Faulkner said.
Faulkner is “mostly” bullish on oil prices going into 2016 and heading into the $50 territory although the upswing will be a slow climb and may not occur until the middle of the year with the “WTI/Brent spread still tight as it is now,” he said.
The bottom-line on the Saudi Arabia/Iran conflict is that it could wind up being a “flash point but until there’s something that affects supply, it’s not going to drive oil prices more than what you saw Monday,” Faulkner said.
“We like to say with gasoline prices – they tend to float up like a feather and drop like a rock,” he said. “We’ve already had oil prices drop like a rock and from a producer’s perspective and right now we would be as happy as could be if they would begin floating up like a feather.”