Oil prices stabilised today, shrugging off yesterday's volatile trading - but fears over a supply glut kept a lid on prices.
Brent crude, the global benchmark, was down 0.35 per cent at $37.09 per barrel in morning trading, while West Texas Intermediate, the US benchmark, shed 0.33 per cent at $36.64.
Oil prices yo-yoed yesterday, driven by an escalating diplomatic row following Saudi Arabia's execution of a prominent Shi'ite cleric. Saudi Arabia banned all flights to and from Iran and said commercial ties would be cut, a day after it ended diplomatic relations between the two.
Impending strife in the region sent crude oil prices up briefly by four per cent before they fell back to around $37 a barrel.
This morning, gloomy Chinese data stoked concern about how sharply the world's second largest economy is slowing, with negative implications for the supply glut. Despite slowing global demand, producers have been unwilling to cap supplies. This has helped send oil prices down by around two-thirds lower since mid-2014.
Conversely, investment bank ANZ said political tensions between Saudi Arabia and Iran "will further aggravate the oversupply situation in 2016".
It will "reduce the likelihood of any collaboration between the two oil majors regarding oil output as Iran re-enters the international market once sanctions are lifted.
Separately, German foreign minister Frank-Walter Steinmeier urged the two powers to put their differences aside and focus on opposing the Islamic State.
"I hope that the turbulence will soon end, reason prevails and Riyadh and Tehran focus on what's really important - defusing the military conflicts, fostering political solutions in Syria, Yemen and elsewhere and thus pulling the rug out from under ISIS," he said in an interview with Bild.
"The whole Middle East, and especially Saudi Arabia and Iran, are somewhat indebted to us. The international community has worked extensively for years to bring peace to the interrelated conflicts in the region."