Here's a major red flag in the oil market

Iranian protesters chant slogans as they hold pictures of Shi'ite cleric Sheikh Nimr al-Nimr during a demonstration against the execution of Nimr in Saudi Arabia, outside the Saudi Arabian Embassy in Tehran January, 3, 2016.
Raheb Homavandi | TIMA | Reuters
Iranian protesters chant slogans as they hold pictures of Shi'ite cleric Sheikh Nimr al-Nimr during a demonstration against the execution of Nimr in Saudi Arabia, outside the Saudi Arabian Embassy in Tehran January, 3, 2016.

Here's all you really need to know if you're trying to figure out the oil market: Iran and Saudi Arabia are at war. Everything else is secondary.

No, Iran and Saudi Arabia are not in a head-to-head war on an actual battlefield. But they are at war just the same, and the battle is being fought with more intensity now, on more fronts, and with more proxies than ever before. And one of the fiercest battlegrounds is oil, where Iran's post-nuclear deal/relaxed sanctions re-entry into the entire global crude market has given Tehran a new weapon to against its rivals in Riyadh.

And that weapon came out of its case Wednesday when Iran decided to interrupt the budding Saudi-Russian reduced production deal and announce that it's not going to reduce production at all. In fact, it sure sounded like Iran will do whatever it can to make up for any supply losses to the overall market.

That pumped the brakes on the modest crude rally and now the entire Saudi-Russian deal is more in doubt than ever. That's too bad for the poor saps who bet big on oil based on the news of that production pact.

That means Iran is willing to endure losing oil revenues in return for hurting Saudi Arabia more. And since Iran can now legally sell more crude on the open market than it has in decades, it's actually not sacrificing all that much revenue compared to the never-sanctioned Saudis.

And, of course, the suddenly cash-strapped and budget-conscious Saudis aren't including arming themselves and their closest allies in their recent cost-cutting efforts. Saudi Arabia has not only been arming itself with newer and more numerous weapons systems, it's been lending money to its fellow Sunni nations like Egypt and the smaller Gulf states so they can arm up more as well.

All of this is a result of the Obama administration-led nuclear deal with Iran, which the rest of the Middle East has interpreted as definitive proof that the Iranian mullahs are closer and more likely than ever to get nuclear weapons.

Just this week, Iran's Supreme Leader Ali Khamenei blasted the Saudis for their maintenance and management of the Islamic holy sites in Mecca. This is a standard complaint Shia Iran makes against the Saudis every time it wants to signal yet another ramping up of the conflict between the two nations. And the conflict is really just a continuation of the real war in the Middle East that's been going on and off for the last 1,400 years. Every violent or cold political, or financial act made by a Muslim country or even an Islamic terror group is somehow connected to the Sunni-Shia conflict. And the commodities markets are no exception.

So if you're watching the oil markets, all you need to do is wait to see a Saudi move to manipulate prices be quickly countered by the Iranians. And similarly, anything Iran does in connection to the United States, including the recent spate of provocative Iranian patrol boat harassment of U.S. Naval ships in the Gulf, is often not really so much about the U.S. as it is about Iran's dispute with the Sunnis in Saudi Arabia or Saudi clients elsewhere.

President Obama clearly wanted to balance America's involvement in this Sunni-Shia conflict by pushing so hard for the nuclear deal with Iran. In light of our many decades of friendship with the Saudis, the White House seemed to think this would improve out fortunes in the region. But as the aggressive Iranian actions in the Gulf and its already questionable adherence to the nuclear deal rules prove, all the nuclear deal has produced is more instability.

That instability currently includes oil prices that simply cannot sustain a rally for going on two years now. And while many American consumers surely like that result when they visit the gas pump, they may like it a lot less if a depressed oil market brings the world closer to an actual Middle Eastern war. Because no matter how isolationist the next presidential administration promises to be, there's simply no way a wider war in a region with so many of our allies will be something the U.S. can stay out of for long.

Commentary by Jake Novak, a senior columnist for Follow him on Twitter @jakejakeny.

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