Brent falls below $35, analysts eye Iranian exports and gepolitical tensions

Oil futures were again probing their 2015 lows on Wednesday with an unexpected move by China’s central bank to weaken their currency a tad – amid recent ructions in the country’s stock markets – apparently acting as a catalyst.

However, this time around, possibly due to last weekend’s tensions between Iran and Saudi Arabia, most market commentary was also emphasising the implications of the stand-off for the two countries respective output policies and the risk of political instability in the Kingdom from lower oil prices.

From a fundamental standpoint, and casting China worries aside for the moment, some market observers were quite focused on the impending start of Iranian crude exports should sanctions being lifted in January.

“That could see the Persian country upset the political status-quo established Gulf Cooperation Council (GCC) nations over the past decade,” Alberto Gallo, head of macro strategy at RBS said in a research note sent to clients.

As dialogue breaks down between OPEC’s largest oil producer (Saudi Arabia) and potentially OPEC’s largest swing producer (Iran – it could increase production by 0.5mboed, albeit at a slow pace), oversupply will likely continue, if not get worse, in our view.

Furthermore, with lower social spending and cuts to subsidies in Saudi Arabia, which faces the risk of oil staying low for longer, “comes the risk of rising domestic turmoil, as highlighted by the Arab Spring in 2011 when high inflation, lower growth and inequality resulted in mass demonstrations across the Middle East,” RBS said.

The geopolitical backdrop in the region was already extremely tense, according to various reports, given what some had been describing as 'proxy' wars between Iran and Saudi Arabia in Syria and Yemen.

As of 14:53 front month Brent crude futures were 4.65% lower to $34.80 per barrel in ICE trading.