Oil’s tug of war

It's been one of the key global economic and market questions of the past few days: how will oil markets react, caught between the grim uncertainty over Japan's ongoing tsunami and nuclear crisis, and continued unrest and violence in the Middle East?

It appears we have a verdict, at least for a day, and the news is not good for the global economy:

Oil prices spiked 2 percent today, as traders focused on escalating violence in the Middle East. On Tuesday, brent tumbled to a three-week low of $107.35 a barrel amid the Japan disasters, and what a slowdown in the world's third-largest economy might mean for global oil demand.

But today, brent crude surged $3 per barrel in early trading amid rising concerns over Bahrain, and the eastward push in oil-producing Libya of forces loyal to Muammar Gaddafi.

After a volatile day of trading, it settled at $110.62, up $2.10.

The quick takeaway?

It seems that turmoil in the Middle East is scarier than radiation and nuclear catastrophe — at least to oil traders. That's particularly true when Saudi Arabia and Iran are involved.

"Saudi is not happy about what is going on in Bahrain. The situation in Bahrain is potentially destabilizing for Saudi Arabia," David Morrison, a strategist at GFT, told Reuters.

The situation in Bahrain is indeed deteriorating rapidly, as the tiny Gulf country is shaping up to be a key battleground between Shia and Sunni Islam.

According to GlobalPost Riyadh correspondent Caryle Murphy:

"The unrest that began last month has increasingly showed signs of a sectarian showdown: (Bahrain's) Sunni leaders are desperate to hold power, and majority Shiites are calling for an end to their dynasty. A Saudi-led force from Gulf allies, fearful for their own regimes and worried about Shiite Iran's growing influence, has grown to more than 1,000 soldiers," Caryle writes today.

Of course, Shia Iran is none-too-pleased:

“The presence of foreign forces and interference in Bahrain’s internal affairs is unacceptable and will further complicate the issue,” Ramin Mehmanparast, the Iranian Foreign Ministry spokesman, told a news conference in Tehran, according to state-run media.