Oil extends rout, falling below $US35 a barrel

January 7, 2016
The Age
Oil prices fell below $US35 per barrel for the first time since 2004, tumbling as much as 5.9 per cent as the row between Saudi Arabia and Iran made any cooperation between major exporters on cutting output even more unlikely.
Supplies in Cushing, Oklahoma, the delivery point for West Texas Intermediate crude, climbed to an all-time high of 63.9 million. A sharp rise in gasoline stocks in the US also reinforced the picture of a market that is awash with oil and refined products.
The international furore over Saudi Arabia’s execution of a Shi’ite cleric ended speculation that OPEC members might agree to production cuts to lift prices.
“There are rising stockpiles and the tension between Iran and Saudi Arabia makes any deal on production unlikely,” said Michael Hewson, chief market analyst at CMC Markets.
Evidence of slowing economic growth in China and India has meanwhile fuelled fears that even strong demand elsewhere may not be enough to mop up the excess crude that has resulted from near-record production over the last year. Analysts from Citigroup to UBS Group predict crude may approach $US30 in the coming months.
Benchmark Brent futures were down $US1.81 or 4.97 per cent at $US34.61 a barrel at 12.42pm New York, after earlier slipping to $US34.26, the lowest since July 2004.
US crude futures were down $US1.66 or 4.61 per cent to $US34.31 a barrel.
Oil has slumped from above $US115 in June 2014 as shale oil from the US has flooded the market, while falling prices have prompted some producers to pump even harder to compensate for lower revenues and to keep market share.
Adding to this oversupply, Iranian oil exports are widely expected to increase in 2016 as Western sanctions against Tehran over its nuclear programme are lifted.
“Shale (oil) production and increasing capacity from countries like Russia who need to protect revenue combined with expectations of further Iranian supply mean actual production as well as expectations of future production are rising,” Hewson said.
However, a senior Iranian oil official said the country could moderate oil export increases once sanctions are lifted to avoid putting prices under further pressure.
Also feeding into the overall weak market sentiment, a survey showed that China’s services sector expanded at its slowest pace in 17 months in December, following on from weak factory data on Monday which also knocked markets globally.
The People’s Bank of China set a weaker midpoint for the yuan, prompting concerns that the economy of the world’s largest energy consumer could be in worse shape than believed.
Stockpiles at Cushing, which is also the biggest US oil storage hub, rose 917,000 barrels in the week ended January 1, according to the Energy Information Administration. Nationwide, inventories fell 5.09 million barrels to 482.3 million last week, the EIA said. A 500,000- barrel overall gain was projected in a Bloomberg survey.
Crude output rose by 17,000 barrels a day to 9.22 million, the highest since August. That’s down from a four-decade high of 9.61 million reached in June, weekly data show.
Investors shrugged off an unexpected fall in crude stocks, instead focusing on the massive oversupply of oil products, with distillates as well as gasoline inventories gaining.
“As big as the crude oil drawdown was, the build in gasoline was even more spectacular and crushing to the market. Gasoline was the sole source of strength within the complex, and that looks to have ended,” said John Kilduff at Again Capital.
Gasoline supplies increased 10.6 million barrels to 232 million. It was the biggest gain for the motor fuel since May 1993. Supplies of distillate fuel, the category that includes diesel and heating oil, climbed 6.3 million barrels to 159.4 million.
Oil’s collapse may increase borrowing costs for producers as revenue falls. Oil-rich Alaska had its credit rating cut by Standard & Poor’s as low prices left the state with a growing gap in its budget. Moody’s Investors Service said Tuesday that metals and energy producer Freeport-McMoRan’s debt is under review for possible downgrade.
www.cmcmarkets.co.uk
with Bloomberg