As Sunni Muslim countries followed Saudi Arabia’s lead and cut off diplomatic ties with Iran Monday, energy analysts say the two countries are likely to leave oil production out of their squabble.
J.F. Seznec, a non-resident senior fellow at the Atlantic Council’s Global Energy Center, said Monday he believes the two nations may have a lot of tension but they’re unlikely to drag their economies into their dispute.
“I think they’ll agree to focus on their political and sociopolitical issues and not on oil,” he said. “[They’ll say] we fight on everything but let’s leave the real stuff out of it.”
On Saturday morning, Saudi Arabia executed 47 people the kingdom deemed to be engaged in terrorist activities, one of whom was prominent Shiite cleric Nimr al-Nimr. The death of al-Nimr was widely condemned by European countries and the State Department.
In Iran, the execution was met with protests that turned violent outside of the Saudi embassy. Protesters threw Molotov cocktails at the building and eventually stormed it in a scene reminiscent of the 1979 incident at the American embassy that touched off the hostage crisis.
Following the attack, the Saudis announced Sunday they were severing all diplomatic ties with Iran. On Monday, Bahrain and Sudan cut diplomatic ties as well and the United Arab Emirates downgraded its diplomatic relations with the Islamic Republic.
In the first day of trading after the conflict began, oil prices remained mostly stable. West Texas Intermediate crude dropped 28 cents and Brent crude dropped 6 cents.
Gene McGillian, a senior analyst at Tradition Energy, told Bloomberg that the risk in the oil markets isn’t as bad as it looks at first glance.
“The geopolitical risk is a little overstated,” McGillian said. “The market is focusing on weak fundamentals. The supply glut is outweighing the geopolitical tension.”
But that doesn’t mean the tensions can be ignored as a factor in oil prices, said Phil Flynn, an analyst at Price Futures Group.
“The Saudi-Iran standoff is certainly one to worry over given its ramifications for oil supply,” Flynn told Reuters.
There are a couple of different worst-case scenarios, Seznec said.
He said there is a scenario in which Iran could slow or even block access to the Strait of Hormuz, through which about 20 percent of the world’s oil passes. That would cause oil prices to soar and have a huge impact on the world economy.
Seznec said another possibility is the Saudis twisting the knife into Iran by increasing oil production further. By increasing oil output another million barrels per day, the Saudis could drive oil prices down to $20 per barrel.
He predicted that would have catastrophic consequences for Iran, including bringing down the government run by Prime Minister Hassan Rouhani. If Rouhani were to fall, it would remove one of the few people in the Iranian government’s leadership willing to make a deal with Saudi Arabia.
If production were increased, it would hurt the Saudi Arabian government but the Saudis have more cash available than the Iranians, insulating them more from collapsing prices, Seznec said.
Given such catastrophic consequences with those two scenarios, Seznec said the most likely outcome is for both countries to make sure the oil market isn’t affected by their dispute.
“It’s in nobody’s interest [to mess with the market],” Seznec said.
