SINGAPORE (REUTERS) - Oil prices jumped over 2 per cent in the first trading hours of 2016 on Monday (Jan 4) as relations between Middle Eastern rivals Saudi Arabia and Iran deteriorated following Riyadh's execution of a prominent Shi'ite Muslim cleric.
Saudi Arabia cut diplomatic ties with Iran on Sunday, responding to the storming of its embassy in Tehran in an escalating row between the two major oil producers over Riyadh's execution of cleric Nimr al-Nimr.
Global oil benchmark Brent climbed over 2.5 per cent and more than a dollar to a morning high of US$38.50 per barrel on Monday, before easing back to US$38.28 at 0136 GMT - still up US$1. US crude's West Texas Intermediate (WTI) futures were up 76 cents, or 2.05 per cent, at US$37.80 a barrel.
Despite this jump, oil prices are down by two-thirds since mid-2014 on ballooning oversupply as producers pump between 0.5 and 2 million barrels of oil every day in excess of demand.
"It's bizarre. We left 2015 on a low, but everybody knew that geopolitics can be one of the biggest price drivers in oil. And now we're back in the office to a new year, political risk is right back into the market," said an oil trader.
Iranian protesters stormed the Saudi embassy in Tehran early on Sunday and Shi'ite Iran's top leader, Ayatollah Ali Khamenei, predicted "divine vengeance" for the execution of Sheikh Nimr al-Nimr, an outspoken opponent of the ruling Al Saudi family.
Saudi Arabia is the world's biggest oil exporter while Iran, which has some of the biggest proven reserves, hopes to ramp up exports following an expected lifting of sanctions against it after reaching a deal over its alleged nuclear weapons development programme.
"We are on track to see the implementation of the Iran deal move forward," said deputy national security adviser Ben Rhodes in Hawaii, where US President Barack Obama is on vacation.
Iran's oil exports fell to around 1 million barrels per day (bpd), down from a peak of almost 3 million bpd in 2011, before the sanctions were put in place.
Iran plans to raise oil output by half a million to 1 million bpd post sanctions, although Iranian officials said over the weekend they did not plan to flood the market with its crude if there was no demand for it.
Hurt by falling prices, some OPEC-producers like Venezuela are calling for coordinated action to cut output, but the group's biggest producers in the Middle East have so far shown no will to cut without a simultaneous reduction by other major producers like Russia.
Oil output in Russia, one of the world's three biggest producers next to Saudi Arabia and the United States, hit a post-Soviet high in 2015 averaging 10.73 million bpd, up from 10.58 in 2014.