Oil price futures rose then fell Monday as energy markets were buffeted by news that Saudi Arabia, the UAE, Bahrain and Egypt had cut ties diplomatic ties with Qatar.

Brent Crude futures for delivery in August climbed as much as 1.25% in early trading before tumbling to trade midday in London at $49.50, down 0.8%. West Texas Intermediate futures for July followed the same route, up 1.2% in early trading before sliding to $47.25, down 0.8%.

Saudi Arabia and its allies said Monday that Qatar's diplomats have 48 hours to leave their countries and said they would cut transport links with the tiny Persian Gulf nation in protest against Qatar's alleged "embrace of various terrorist and sectarian groups aimed at destabilizing the region." They also dumped Qatar from a Saudi-led coalition fighting in Yemen.

The move escalates a rumbling dispute between Qatar, its sometime partner Iran, and their regional neighbors, but its direct effect on oil production is likely to be limited and could be outweighed by more important factors. Hence the oil price yo-yoing.

The first thing to note is that the diplomatic and transport embargo will have no effect on Qatar's ability to export oil, meaning its relatively small output of about 600,000 barrels per day of production will continue to flow.

At the same time the raised tensions heighten the prospect of a break down of cooperation in OPEC, notably between Iran and the Saudis. That increases the likelihood that the cartel's 1.8 million barrel oil production cut, recently extended for nine months, will falter.

Qatar Airways Plane.
Qatar Airways Plane.

There are already hints that it was being widely flouted. OPEC shipments appear to have climbed by about 1 million barrels per day from May to April, according to research by Thomson Reuters Oil Research that was released on Monday.

Meanwhile US domestic output continues to grow - heaping even more pressure on WTI prices. The US onshore rig count climbed by 11 last week, according to Goldman Sachs Weekly Oil Rig Monitor. Since a trough in May 2016, the number of rigs in the US has climbed 132% and shows no sign of abating.

"Despite limited recent hedging and lower prices over the last three months...the uplift (in rig count) continues to be driven by private equity backed and high yield producers," Goldman Sachs analysts noted on Monday.

And there is one other piece of news to watch - and one that could have a far more significant effect on US oil prices than the Qatari furor. The Trump administration is considering sanctions on Venezuela's state-owned oil company PDVSA as part of a wider ratcheting up of pressure on the government of President Nicolas Maduro, according to a report by Reuters on Sunday.

PDVSA provides as much as 800,000 barrels of oil per day to the U.S. market, making it the No.3 foreign supplier after Canada and Saudi Arabia. Sanctions would have a devastating effect on Venezuela, which sells just over a third of its oil to the US, but would also provide a bump to WTI.

Click here for the latest business headlines.

Read More Trending Articles: