Tension between Saudi Arabia and Iran isn't enough to help oil prices

DALLAS - It turns out that thanks to a glut of crude, even tension between two big oil-producing countries isn't enough to drive prices higher.

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Oil futures spiked briefly on Monday after the news that Saudi Arabia would cut diplomatic ties with Iran, a development that could be seen as a threat to oil supplies.

Investors quickly discounted those fears, however. After rising by $1.35, the price of benchmark U.S. crude ended the day down 28 cents to $36.76 a barrel on the New York Mercantile Exchange. Brent crude, reflecting the price of international oils, dipped 6 cents to close at $37.22 a barrel in London.

While oil markets were see-sawing, stock markets sagged on evidence that the global economy might be weaker than expected this year. The Dow Jones industrial average lost 276 points, or 1.6 per cent, and was down 468 points earlier in the day.

New reports indicated that manufacturing is continuing to struggle, with factory activity falling in December for the second straight month in the U.S. and the 10th straight month in China.

Slow growth means that the current oversupply of oil could be more stubborn than expected. Government figures show that the stockpile of U.S. crude oil grew by 2.6 million barrels during the week ended Dec. 25 and were 9.9 million barrels higher than a year ago.

Oil prices are likely to remain about where they are until either production drops or the world economy perks up and drives demand higher.

Investors may have regarded the flash of tension between the Saudis and the Iranians over Saudi Arabia's execution of an opposition Shiite cleric as merely saber-rattling. Stewart Glickman, an analyst with S&P Capital IQ, said geopolitical risk has lost some of its ability to influence on oil prices.

"It is maybe a sense of security from the marketplace that with this seeming glut of crude oil that you can have tensions in Middle East and they don't count for as much as they used to three or four years ago," he said in an interview.

The explanation lies partly in robust production from the U.S., Glickman said. Saudi officials are reluctant to cut production in a bid to raise prices because they'll just concede sales to U.S. producers who will fill the void in supply.

Iran wants to regain some oil exports that it lost while under economic sanctions, soon to be lifted, for its nuclear program. Judith Dwarkin, chief economist at ITG Investment Research, said that the confrontation with Saudi Arabia makes the Saudis unlikely to offset Iranian increases by trimming their own production - potentially adding to the glut.

Then there is the question of demand. Weak manufacturing numbers and a plunge in the Shanghai Composite stock index raised new concern about energy demand in China, the world's second-biggest economy.

The U.S. Energy Information Administration forecasts that the average price of U.S. benchmark crude this year will rise about 4 per cent over 2015.

If that is correct, American motorists will continue getting a break on gasoline compared with prices not long ago. On Monday, the nationwide average price for a gallon of regular was $1.99, according to the auto club AAA - 22 cents cheaper than a year ago.

The Energy Information Administration estimates that the average U.S. household saved about $660 on cheaper gasoline last year, compared with 2014.


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