Saudi and Iran are divided by the sword, not OPEC

The Middle East's oil superpowers are butting heads. Saudi Arabia has escalated a bitter feud by accusing Iran of an "act of war" following a rebel missile attack on Riyadh. The stakes are high for both protagonists but their belligerence has its limitations. Neither side can afford their OPEC pact to be broken by conflict.

Brent has touched fresh two-year highs this week pushing close to $65/b on Tuesday after the attempted strike by Yemeni insurgents was intercepted over the weekend.

The attack provoked Saudi Crown Prince Mohammed bin Salman to accuse Iran -- which backs rebels in Yemen -- of "direct military aggression" against the kingdom.

Iran's foreign minister, Javad Zarif, fired back that Saudi's "risky provocations" threatened the Islamic Republic.

Despite the mud slinging, their squabble is unlikely to interrupt oil supplies, or change their cooperation in OPEC where both sides have worked together over the last year to rebalance the market.

“Oil matters don’t follow the same rules of engagement for Saudi and Iran as in other areas," Valerie Marcel, senior energy research fellow at London-based Chatham House, told S&P Global Platts. "Iran and Saudi are more aligned now on oil policy than previously was the case. Saudi isn't picking a fight with Iran at OPEC."

Both producers -- which pump almost a seventh of world supply -- have buried their differences at OPEC.

Saudi Arabia has cut Tehran some slack in Vienna. Under the current agreement -- expected to be extended on November 30 -- Tehran was given room to increase its output modestly to an average of 3.8 million b/d this year.

By comparison, Saudi was making much bigger sacrifices to its own production, cutting output by about 565,000 b/d to an average of about 10 million b/d up to October, according to Platts estimates.

But there are risks.

Any direct military hostilities in the Gulf could threaten energy supplies from the region including gas. The Gulf's Strait of Hormuz is the world's busiest oil chokepoint.

The 21-mile wide channel -- which is dominated by Iran -- conveyed about 18.5 million b/d of crude and oil products last year, according to the Energy Information Administration.

Any attempt to block the conduit by Iran could easily trigger an oil shock.

However, such action would be self-destructive. The US maintains two giant nuclear aircraft carriers in the region to keep trade routes open and prevent a repeat of the "tanker war" of the early 1980s conflict between Iran and Iraq.

Saudi Arabia -- which prides itself on being a reliable global energy supplier -- also has no interest in upsetting the apple cart.

That isn't to say an intense rivalry between both sides doesn't exist to win market share in growing markets like India and Asia. But that competition is purely commercial.

Instead of dividing Riyadh and Tehran, oil could be one of the few shared interests bringing them together.