Oil Hits Two-Year High Amid Crackdown in Saudi Arabia

Oil prices surged to fresh two-year highs Monday on rising tensions in the Middle East following a wave of arrests in Saudi Arabia and a missile attack on Riyadh by Yemeni rebels.

U.S. crude futures recently rose $1.39, or 2.5%, to $57.03 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, rose $1.69, or 2.72%, to $63.76 a barrel on ICE Futures Europe.

Oil has rallied in recent months, climbing more than 30% from lows hit in June. Escalating tensions in the Middle East have helped fuel the rise, with investors becoming more attuned to the possibility that skirmishes and conflicts could disrupt oil flows as supplies have tightened around the world.

"It is an extremely long list reminding the market how fragile the oil market is," said Gary Ross, head of global oil analytics at S&P Global Platts.

Crude prices again rose Monday after officials in Saudi Arabia detained more than five dozen princes, ministers and prominent businessmen in a bid to tackle alleged corruption in the country. Analysts described the sweep as a major shake-up in Saudi Arabia's establishment as Crown Prince Mohammed bin Salman consolidates his power.

Some observers said the move is unlikely to bring a shift in the kingdom's efforts to bring down global crude supplies.

"Saudi output policy remains unwavering and the events of the weekend sent a constructive tone as we head into the OPEC meeting later this month," said Michael Tran, director of energy strategy at RBC Capital Markets. "The center of power rests with Mohammed bin Salman now more than ever and he is the vision behind the current Saudi oil policy."

But investors are concerned that the power struggles in Saudi Arabia, the world's top exporter of crude, brings a new source of uncertainty, given the kingdom's outsize impact on the global oil market and its role as the de facto leader of the Organization of the Petroleum Exporting Countries.

"They're the big producer within OPEC and they can call the shots. It's a situation in an area where any disruption is magnified significantly," said Donald Morton, senior vice president of Herbert J. Sims & Co., who oversees an energy trading desk.

Oil futures were also buoyed after Yemen's Houthi rebels fired a ballistic missile on Saturday that reached the outskirts of Saudi Arabia's capital before being shot down.

Riyadh is leading a U.S.-backed military coalition that is fighting to unseat the Houthis, whom it sees as proxies of its main regional rival for power, Iran. The coalition began airstrikes, and then a ground campaign, against the Houthis in 2015.

No one was injured but the incident has deepened fissures between Saudi Arabia and Iran, both members of the Organization of the Petroleum Exporting Countries.

"It just adds another level of uncertainty," said Andy Lipow, president of Lipow Oil Associates. "This could lead to further turmoil in the Middle East."

Analysts are particularly concerned that the ramped up hostilities could frustrate moves to prop up the price of oil and remove a global crude glut.

As OPEC's November meeting nears, some market participants are counting on the group to agree to another extension of the its coordinated output cuts past the first quarter of 2018. OPEC came to an agreement last year with several other major producers including Russia to curb oil output by 1.8 million barrels a day, and the reductions have helped drain the bloated global stockpiles that have stressed the market for more than three years.

Still, some say that heightened tensions in the Middle East are overshadowing potential bearish risks that could cause crude prices to tumble, including a rise in U.S. production.

"We are still convinced that the fundamental data justify a significantly lower oil price," said analysts for Commerzbank in a recent note. "After all, OPEC's continued implementation of the supply cuts is unlikely to be enough on its own to rid the oil market of the surpluses in the longer term."

Despite a reported decline in U.S. drilling activity, analysts point to rising U.S. shale production because of higher oil prices.

U.S. crude exports hit a record of more than 2 million barrels a day in data from the Energy Information Administration last week.

Gasoline futures rose 3.73 cents, or 2.08%, to $1.8307 a gallon. Diesel futures rose 3.93 cents, or 2.08%, to $1.9259 a gallon.

Write to Alison Sider at alison.sider@wsj.com and Neanda Salvaterra at neanda.salvaterra@wsj.com

(END) Dow Jones Newswires

November 06, 2017 15:51 ET (20:51 GMT)