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Crude Hits New Lows Despite Geopolitical Unrest

The conflict between Saudi Arabia and Iran appears to be escalating, but oil markets continue to shrug off the news.

Less than a week after the Saudi embassy was torched in Tehran and diplomatic relations between the two countries were severed, Saudi Arabia might have taken the conflict to a new level. On January 7, Iran accused Saudi Arabia of damaging its embassy in Yemen from an air strike.

Iranian state media said that Saudi-led coalition planes deliberately struck the Iranian embassy in Yemen, although the accuracy of the claims are yet to be verified. Other sources say airstrikes only struck near the embassy and that there was no actual damage to the embassy itself. Witnesses say the airstrike hit a home across the street from the Iranian embassy in Sana, and that some shrapnel may have injured embassy guards.

“This deliberate attempt by the Saudi government is in violation of all the conventions and regulation of international law on the protection and the security of diplomatic premises in all situations, and the responsibility for the action, as well as compensation for damage done to the building and injuries to the embassy staff, lies with the government of Saudi Arabia,” a spokesman for the Iranian foreign minister said in a statement. Related: Saudi Arabia Throws Down The Gauntlet, But To Whom?

The war that Saudi Arabia is waging in Yemen has long been viewed as a proxy fight with Iran. Saudi Arabia accuses Iran of backing Houthi rebels while also alleging that Iranian commanders are actually fighting in Yemen. Iran denies this. However, the diplomatic spat between Iran and Saudi Arabia over last weekend’s execution of a prominent Shiite cleric could yet escalate into a much worse situation. Direct military confrontation remains a remote possibility, but the accusation of Saudi airstrikes illustrates the fragility of the situation.

Oil traders ignore unrest

The confrontation is having almost no discernable effect on oil markets, despite the fact that the two countries are massively important to world oil supplies. WTI and Brent continue to lose value at an impressive rate, with Brent dipping below $34 per barrel during intraday trading on January 7. Despite the traditional market jitters that take place when violence erupts in the Middle East, the world remains woefully oversupplied.

In fact, 2016 started off with a rash of bearish news for the oil markets. Global financial turmoil is easily eclipsing the Saudi-Iran conflict in terms of importance for crude prices. China’s stock market was shut after 30 minutes of trading on January 7 after the markets fell by 7 percent. That was the second time in four days of trading so far in 2016 that the markets were shuttered after the “circuit-breaker” was triggered, a backstop measure intended to prevent panic selling. The beginnings of another stock market meltdown is reverberating around the world. On January 7, the FTSE 100 was off 2.6 percent during midday trading; Germany’s Dax was down by more than 3 percent; and the Dow Jones opened by moving down another 1.5 percent. Related: Why The U.S. Can’t Be Called A ‘Swing Producer’

Oversupply, slowing demand, and financial turmoil are adding up to another round of price declines for crude oil. Brent was down below $34 per barrel on Thursday, but other benchmarks are actually selling much lower than that. OPEC’s basket price dropped below $30 per barrel on January 6, breaking through a key psychological threshold. The daily basket price sold for $29.71 per barrel on Wednesday.

Western Canadian Select, which tracks heavy crude in Canada, fell to $19.81 per barrel on January 6. Some high-cost Canadian producers including Baytex Energy Corp. and Canadian Natural Resources Ltd., have already shut in more than 35,000 barrels per day because prices too low. “We’re below shut-in levels” Tim Pickering, founder of Calgary-based Auspice Capital Advisors Ltd., told Bloomberg News. “We’re the last barrel produced and we’re the first barrel shut in.” Related: 10 Key Energy Trends To Watch For In 2016

The EIA also poured some cold water on oil markets on Wednesday. The agency believes that U.S. oil production stood at 9.22 million barrels per day for the week ending on January 1, the third consecutive week of small production increases. Most energy analysts have been predicting that the U.S. would be experiencing sizable production losses at this point. Also, even though overall crude inventories fell by 5.1 million barrels, storage levels at Cushing actually grew to an all-time high for the week ending on January 1, according to Genscape.

In 2015, Goldman Sachs said that it was possible that oil would fall into the $20s per barrel before all was said and done, an estimate that some thought was ridiculous at the time. A few crude benchmarks are already trading at those levels, and WTI and Brent might not be too far behind.

By James Stafford of Oilprice.com

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