Oil hits 11 year low following Saudi-Iran row

Saudi-Iran row reduces chances of output restraint sending oil prices to 11 year low

Photo by: Reuters
Photo by: Reuters

Oil hits 11 year low in Saudi Arabia

Oil prices slid more than 4 percent to new 11-year lows on Wednesday after a row between Saudi Arabia and Iran made any cooperation between major exporters to cut output even more unlikely.

The furor over Saudi Arabia's execution of a Shiite cleric has stripped nearly 8 percent off the price of oil in the last three trading days, killing speculation that OPEC members might agree to production cuts to lift prices.

"There are rising stockpiles and the tension between Iran and Saudi Arabia make 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 fueled 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.

Benchmark Brent crude futures were at $35.07 a barrel at 1318 GMT, down $1.58 on the day, and reached their lowest since early July 2004, having staged their largest one-day drop in percentage terms in nearly five weeks.

US crude futures were down $1.25 cents at $34.72 a barrel after slipping 79 cents the previous day.

Oil has slumped from above $115 in June 2014 as shale oil from the United States 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 program are lifted.

"Shale 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.

Still, 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 broad market weakness, 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.

In the United States, concerns over mounting oil stock levels persisted, with crude inventories likely to have risen by 439,000 barrels last week, according to a Reuters poll of eight analysts.

The US Energy Information Administration (EIA) will publish its closely watched weekly data at 1530 GMT.

Some analysts think oil prices have fallen too far and will stage a sharp recovery later in the year, with Commerzbank targeting $60 per barrel by the end of 2016.

"This looks ambitious from current levels but current prices are unsustainably low," Carsten Fritsch, senior oil analyst at Commerzbank, told the Global Oil Forum. "We are in a speculative exaggeration at the moment."

He added that he expects US oil production to fall at least 1 million bpd by autumn.