At almost any other time, an escalating diplomatic conflict between OPEC members Iran and Saudi Arabia would mean a spike in oil prices.

That the rally this time couldn’t be sustained shows just how abnormal things are in the oil market. Brent crude is little changed this week as a global supply glut and the slowest Chinese growth in a generation trumped mounting strife between the nations on either side of the world’s busiest waterway for oil tankers.

“When oil supplies were tight, we’ve seen bigger reactions to geopolitical tensions,” Tushar Tarun Bansal, a senior oil analyst in Singapore at industry consultant FGE, said by phone Monday. “Now the price rise has actually been quite muted because the world is in a surplus situation.”

There was little more than a blip in crude futures when Saudi Arabia severed diplomatic ties with Iran, as investors focused instead on record stockpiles and rising supply. As Kuwait and the United Arab Emirates lined up to support Riyadh, the internal divisions that prevented the Organization of Petroleum Exporting Countries from making production cuts even as prices plunged to an 11-year low appeared more entrenched than ever.

David Fuller's view

The headline above represents a widely held consensus view for at least the first half of 2016.

The consensus is understandable and may be correct.  However, at some point there will be a ‘needs must’ agreement to reduce oil production. Unless widely discussed, that could catch the market by surprise and push crude oil back above $60 very quickly.  Meanwhile, crude oil’s slump is overextended and unsustainable beyond the short to medium term.  Currently, there is no evidence that the low has been reached at this time but the next sharp move is likely to be upwards.