Brent crude, the international benchmark, closed above US$64 a barrel for the first time since mid-2015 yesterday, and WTI settled at over US$57 as a string of political arrests in Saudi Arabia rattles markets, heightening worry about internal destabilization in the world's number-two oil producer. But it wasn't just the arrests causing the rally.
Regional tensions in the Middle East are also heightening, supporting the price rally and reinforcing a bullish outlook for the near term. Last weekend, Lebanon's Saudi-backed Prime Minister resigned, blaming Iran for destabilizing his country. Saudi Arabia, in turn, accused Lebanon-based Iran-backed group Hezbollah of waging a war against it, with the Kingdom's Gulf affairs minister Thamer a-Sabhan saying the Lebanese government will be treated as "a government declaring war on Saudi Arabia."
There is even a suggestion that Saudi Arabia might try to push Israel into an open conflict with Hezbollah and Iran in Lebanon, as the next move in the never ending Sunni-Shi'a game in the Middle East.
According to analysts, it is this combination of factors that are driving prices up, rather than any single event, even the Saudi government purge. Geopolitical flare-ups in the Middle East have an effect on oil prices, so it's no surprise that prices are flying high.
In this case, however, there is additional support from Nigeria: the country's oil minister hinted yesterday that the country may be ready to start contributing to the OPEC-wide oil production cut deal by capping its production. What's more, the Niger Delta Avengers last week announced the end of a ceasefire agreed earlier this year with the government, which automatically puts oil infrastructure, hence production, at risk. Related: Big Oil Plans Blockchain-Based Trading Platform
With so much bullish news, a remark by Russia's Energy Minister, Alexander Novak, passed relatively unnoticed, though it has bearish implication for prices. Last week, Novak basically threw away the certainty about the OPEC deal extension.
"If we see that the market is not balancing then we'll do it. I can give you a more specific answer if you can find me any person now who can say what the market will look like in five months. If you find a person like this, I will shake his hand," Novak said.
If geopolitical tensions continue high in the Middle East, there is a chance, however small, that OPEC will forgo the extension and instead seek to regain market share lost since January.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
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