One of the puzzling aspects of yesterday’s trading was that oil prices fell.
When I read about the malaise between Saudi Arabia and Iran over the weekend, I assumed that oil prices would gap higher yesterday morning.
Violence in the Middle East has always meant threats to output, which meant potentially lower supply or other disruptions that resulted in higher prices.
In this case, though, the geopolitical tension between these two particular countries actually suggests to markets that Saudi Arabia is even less likely to cut production than they have been previously.
Remember, part of the reason that oil prices have dropped so precipitously is that Saudi Arabia has refused to cut supply even as demand has fallen amid slower global economic growth.
Whatever you may think about the recent Iran nuclear deal, the notion that sanctions would be lifted meant that Iran was planning on increasing their oil production by hundreds of thousands of barrels per day.
Saudi Arabia had already said that they would not cut production despite the new supply that Iran would be adding, which had already put pressure on oil prices. Whatever slim chance there was that the Saudi’s might cut supply is much narrower now.
In fact, it’s now even possible that Saudi Arabia may increase supply in order to put further pressure on oil prices, which would hurt Iran.
The data from China also played into the equation because it is the 10th consecutive month of contraction in their manufacturing sector. Investors assumed that demand in China, the world’s second largest oil consumer, could slow further.
All of this comes on top of news from the US Energy Information Administration, who said that domestic oil production was even higher in the first nine months than previously estimated.
As you might expect for a commodity like crude oil, the laws of supply and demand set the price. Yesterday, the risk of a disruption in supply seemed low in the bigger picture so prices fell.