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Business

Oil prices rise as Saudi-Iran tensions flare

Oil prices have rebounded as tensions between Riyadh and Tehran are mounting following a row over the Saudi execution of a Shiite cleric. But experts say prices will remain low in the face of a global supply glut.

In early trading on Monday, US light oil West Texas Intermediate (WTI) for delivery in February rose by about 2 percent to $37.81 (34.62 euros) a barrel. North Sea Brent crude for February was trading 91 cents, or 2.44 percent, higher at $38.19.

Bernard Aw, market strategist at IG Markets in Singapore, attributed the rise to Saudi Arabia's decision on Sunday to expel Iranian diplomats and close Tehran's embassy in Riyadh.

"Oil started the new year on the mend, as Asian markets reacted to fears that geopolitical tensions in the Middle East may threaten the supply of oil," Aw told the news agency AFP.

Riyadh's move came a day after protesters in Tehran had ransacked the Saudi embassy over the execution of the cleric, Sheikh Nimr al-Nimr. Iran's supreme leader had warned Saudi Arabia it would face "quick consequences" for the execution of the Shiite cleric. Fearing further upheaval in the already volatile Middle East, the United States has urged regional leaders to try to ease tensions.

Watch video 02:33

Iran-Saudi Arabia tensions flare

Brief interlude

Despite the rise, however, analysts believe the persistent global crude oversupply will continue to weigh on prices over the longer term.

"Unless we see a convincing drop in oil output from these two nations, and the broader oil-producing community, the supply glut issue will persist, which means oil prices would remain under pressure for a longer period," said Bernard Aw.

And Sanjeev Gupta, oil expert at consultancy group EY, told the same news agency that "continued adverse news could result in a spike in prices, but the current supply glut would likely restrict any sharp upswings."

Saudi Arabia is the biggest producer in the Organization of the Petroleum Exporting Countries (OPEC), which last month decided against cutting output levels despite a plunge in oil prices. Iran, another key OPEC member, is attempting to boost its oil production after Western nations eased their sanctions imposed over Tehran's nuclear program.

Oil industry woes

With crude prices at 11-year lows, the world's biggest oil and gas producers are facing their longest period of investment cuts in decades. For 2016, they have announced spending cuts, asset sales, job cuts and delays in projects.

According to Oslo-based consultancy Rystad Energy, global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22-percent fall to $595 billion in 2015.

"This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments," Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy, told the news agency Reuters.

After rapidly expanding in the first half of the decade when oil prices were above $100 a barrel, companies are now expected to focus on their most profitable activities.

Therefore, Brendan Warn, oil and gas equity analyst at BMO Capital markets sees no organic growth in oil output and exploration in the foreseeable future.

"In the second half of 2016, if we see price stabilization, I expect companies will be looking to replace reserves inorganically, by making acquisitions," he told Reuters.

uhe/nz (Reuters, AFP, dpa)

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