That wasn't supposed to happen. In the not so distant past, a dramatic escalation in tensions between OPEC nations (in this case Iran and Saudi Arabia) would have led to a spike in crude oil prices. However, as futures opened Sunday night, the brief rally in oil prices was met with selling pressure and instead of buying calls, traders loaded up on $30 puts. The oil market's different this time - here's why...
That the rally this time couldn’t be sustained...
and worse still, traders piled into Deep OTM Puts...
Shows just how abnormal things are in the oil market.. and as Bloomberg reports,
“When oil supplies were tight, we’ve seen bigger reactions to geopolitical tensions,” Tushar Tarun Bansal, a senior oil analyst in Singapore at industry consultant FGE, said by phone Monday. “Now the price rise has actually been quite muted because the world is in a surplus situation.”
There was little more than a blip in crude futures when Saudi Arabia severed diplomatic ties with Iran, as investors focused instead on record stockpiles and rising supply. As Kuwait and the United Arab Emirates lined up to support Riyadh, the internal divisions that prevented the Organization of Petroleum Exporting Countries from making production cuts even as prices plunged to an 11-year low appeared more entrenched than ever.
Simply put, the dispute entrenches the biggest bearish factor in the oil market in the past year -- OPEC’s decision to keep pumping amid falling prices.
Saudi Arabia and Iran are the largest and fifth-biggest producers in OPEC, respectively. Their worsening relations make it even less likely the group could overcome internal differences and agree to an oil-output cut to boost prices, Macquarie said.
“When you see an escalation of this sort -- which is sectarian in nature and involves the broader OPEC group -- it just makes things even more difficult,” Virendra Chauhan, a Singapore-based oil analyst at consultant Energy Aspects Ltd., said by phone. The organization is now “less likely to come to some kind of broader output cut,” he said.
So in the new "good news is bad news" normal, Middle-East tensions are worst news for crude oil. If Saudi's game was to distract its populace, perhaps it worked, but any hope that tensions would imply a 'war premium' have failed drastically and merely exacerbated the fiscal concerns roiling The Kingdom (and its most feared event - social unrest).