London - Oil prices rose on Monday after a breakdown in diplomatic ties between Saudi Arabia and Iran that some analysts speculated could result in supply restrictions, which offset the potential hit from evidence of weakness in Asia’s largest economies.

Saudi Arabia, the world’s biggest oil exporter, cut diplomatic ties with Iran on Sunday in response to the storming of its embassy in Tehran following Riyadh’s execution of a prominent Shi’ite cleric on Saturday.

Saudi Arabia said on Monday it would cut all commercial ties with Tehran, while several of its key Sunni allies joined Riyadh in either severing or downgrading diplomatic relations with Iran.

Benchmark Brent crude futures rose $1.55 on the day to $38.83 a barrel at 1515 GMT, near a session high at $38.99.

U.S. West Texas Intermediate (WTI) futures were up $1.18 at $38.22 a barrel.

“The two questions the market is grappling with are - where next in the Saudi Arabia/Iran stand-off? I think President (Hassan) Rouhani on the Iranian side would like to calm things down and push for no further escalation,” Energy Aspects analyst Richard Mallinson said.

“The second question for the market is is there any uncertainty over the exact timing and volume of the return of Iranian barrels?” he said.

The clash between the two Middle Eastern countries comes as Iran, which holds some of the largest proven reserves, hopes to ramp up oil exports following the expected removal of sanctions against it under a deal over Iran’s contested nuclear program.

“The statements at the weekend by (Iranian oil officials) that Iran would only increase production at the level the market can absorb seem to be a shift in rhetoric,” Mallinson said.

A series of Iranian officials vowed on Friday to expand Tehran’s missile capabilities, a challenge to the United States which has threatened to impose new sanctions even as the vast bulk of its measures against Iran are due to be lifted.

Iran plans to raise output by half a million to 1 million barrels per day (bpd) after sanctions are lifted, although Iranian officials said they did not plan to flood the market with its crude if there was no demand for it.

Iran’s oil exports have fallen to around 1 million bpd, down from a peak pre-sanctions peak of almost 3 million bpd in 2011.

The oil price surrendered earlier gains that boosted futures by as much as 2 percent after data showed Chinese factory activity shrank for a 10th straight month, prompting a 7-percent fall on Chinese stock markets and for trading to be suspended.

Manufacturing activity in India, which the International Energy Agency believes will lead growth in oil demand this year, contracted for the first time in two years.

Stock markets fell sharply in response to the figures from China, which cast doubt on the ability of the world’s largest commodity importer to grow quickly enough to stem a broader global economic slowdown.

“Considering there is very strong pressure on the equity markets, it shows there is some support coming into oil due to geopolitical issues,” Petromatrix analyst Olivier Jakob said.

Oil prices are still down by two-thirds since mid-2014 on oversupply as producers including the Organization of the Petroleum Exporting Countries (OPEC), Russia and the United States pump between 0.5 million and 2 million barrels of oil every day in excess of demand.

A poll published on Monday showed analysts surveyed by Reuters predict an average price of $52.52 a barrel for Brent crude this year, as supply is expected to continue to outpace demand. This compares with a forecast for 2016 of above $70 a barrel just six months ago.