Oil may fall to $18 amid Saudi-Iran tensions: Kilduff

Oil prices could break below $20 this year as tensions rise between Iran and Saudi Arabia, two of the world's largest oil players, Again Capital founding partner John Kilduff said Monday.

"I think you're going to get as low as $18 and maybe get as high as $48. ... It's going to get really ugly," he told CNBC's "Squawk Box." "The Iranians doubled down again, if that's even possible, by saying that they could put 500,000 more barrels on the market within weeks after the sanctions get lifted."

Kilduff was referring to the anticipated lifting of sanctions related to Iran's nuclear program, which have locked the country out of international oil markets.

The world is currently oversupplied with 500,000 to 2 million barrels per day of oil. The glut could reach 3 million if Iran lives up to its vow to ratchet up exports to 1 million bpd as soon as possible.

The chances of Iran cooperating with top oil exporter and fellow OPEC member Saudi Arabia diminished following a diplomatic crisis that started with the Saudi execution of Shiite cleric Nimr al-Nimr this weekend and escalated rapidly. Iran's supreme leader, Ayatollah Ali Khamenei, said the Saudis would face "divine revenge," and Iranian protesters attacked the Saudi embassy in Tehran.

Saudi Arabia then cut diplomatic ties with its Gulf rival. Bahrain and Sudan also severed ties with Iran on Monday, while the United Arab Emirates said it would cut the number of Iranian diplomats allowed in the country. Saudi Arabia is the dominant Sunni Muslim power in the Middle East while Iran is led by Shiites.

Internationally traded Brent crude rose about 2 percent to $38 per barrel on Monday, supported by Iranian-Saudi tensions.

OPEC has declined to impose production caps to prop up crude prices, accelerating a rout that has cut the cost of oil by two-thirds from its highs in 2014.

"OPEC maybe as we know it is over because these two are not going to be coming together any time soon on modifying or moderating production," Kilduff said.

To be sure, the U.S. Energy Information Administration sees U.S. and other non-OPEC production declining by hundreds of thousands of barrels per day by the third quarter of 2016.

Saudi Arabia announced last week it would cut subsidies and undertake other cost-saving measures after its budget deficit ballooned to a record $98 billion in 2015.

Asked whether the Saudis can continue to fund social spending that underwrites domestic stability, Kilduff said the royals risk losing control in some outer districts. However, he said it would be another two to three years before the kingdom's finances tighten substantially.

Saudi Arabia has been contending with protests and an opposition movement that has taken up light arms at times in its eastern provinces, which is home to the Ghawar oil field, the world's largest conventional field.

But the key challenge that will come out of the current Middle East turmoil is unlikely to be instability within Saudi borders, said David Gordon, former director of policy planning for Secretary of State Condoleezza Rice and current senior adviser at the Eurasia Group.

In fact, the move to severe ties with Tehran may be an effort on Saudi Arabia's part to bolster its political base in the Sunni-majority country, he told "Squawk Box" on Monday. Iran is likely doing the same among Shiites, he added.

Instead, Gordon said he sees the feud intensifying proxy battles between the Saudis and Iranians in Syria, whose Alawite leader is backed by Iran, and Yemen, where Saudi Arabia has been bombing Shiite rebels. That will make it more difficult for international players including the United States and Russia to broker a political resolution to the conflicts, he said.

"The small chutes of hope that we had at the end of the year that we might be able to put something together in Syria, that's going to go away I suspect" he said.

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Correction: An earlier version had an incorrect reference to the leader of Iran.