LONDON (Bloomberg) -- Oil reversed earlier gains as a global glut outweighed tensions between Saudi Arabia and Iran.

 

Futures surged as much as 4.6% in London earlier after the Saudi government cut ties with Iran following an attack on its embassy in Tehran by demonstrators protesting the execution of a prominent Shiite cleric. Prices last week capped the biggest two-year loss on record amid speculation a global glut will be prolonged as U.S. crude stockpiles expanded and the Organization of Petroleum Exporting Countries abandoned output limits.

 

"The geopolitical risk is a little overstated," said Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut. "The market is focusing on weak fundamentals. The supply glut is outweighing the geopolitical tension."

 

The Middle East accounted for about 30% of global oil output in 2014, according to the U.S. Energy Information Administration. Iran and Saudi Arabia sit on either side of the Persian Gulf, the site of the world’s biggest concentration of oil tankers.

 

WTI, Brent

 

West Texas Intermediate for February delivery fell 40 cents, or 1.1%, to $36.64/bbl on the New York Mercantile Exchange at 11:37 a.m. The volume of all futures traded was about 17% higher than the 100-day average. Prices lost 11% in December for a second monthly decline.

 

Brent for February settlement slipped 16 cents, or 0.4%, to $37.12/bbl on the London-based ICE Futures Europe exchange. The European benchmark crude was at a premium of 48 cents to WTI. Brent slid 35% last year for a third annual drop.

 

Crude inventories at Cushing, Oklahoma, the delivery point for WTI futures, rose to 63 MMbbl in the week ended Dec. 25, a record high, according to the Energy Information Administration. Domestic production climbed for a third week to 9.2 MMbopd.

 

"We are still facing extra supplies," McGillian said. "There’s going to be some downward pressure on the market."

 

Saudi Arabia

 

Saudi Arabia and Iran are on opposite sides of Middle East conflicts from Syria to Yemen. The current crisis is the worst between the two regional powers since the late 1980s, when the Sunni-led kingdom suspended ties with Shiite-ruled Iran after its embassy was attacked following the death of Iranian pilgrims during Hajj in Mecca. “There are potentials for a lot of disruptions in terms of oil supplies,” said Carl Larry, head of oil and gas for Frost & Sullivan LP in Houston. “Oil could easily go up above $50 if the confrontation escalates.”

 

Saudi Arabia produced 10.25 MMbopd in December, helping to keep OPEC output above 32 MMbopd for a seventh month, according to data compiled by Bloomberg. Iran pumped 2.7 MMbopd and is seeking to boost exports once international sanctions are lifted.

 

Iran will raise exports by 500,000 bpd within a week of sanctions being removed, said Oil Minister Bijan Namdar Zanganeh, according to the official Islamic Republic News Agency. The country will add another 500,000 bopd in a second phase within six months after the curbs end, he said.

 

At the mouth of the Persian Gulf is the Strait of Hormuz, the world’s most important choke point for oil shipments, with about 17 MMbbl of crude passing through daily, according to the EIA.