Oil prices cropped gains after leaping on Saudi-Iran pressures

The slump in oil prices follows the tumble in the Chinese stock market, which went down seven percent on Tuesday due to a drop in manufacturing activity.

USA crude’s West Texas Intermediate (WTI) futures finished down nearly 1 percent, pressured by worries that record inventories could swell further at the Cushing, Oklahoma delivery hub.

“The majority of market participants see the tensions between Saudi Arabia and Iran as negative for the oil price because they make it unlikely that OPEC will agree on any concerted action to reduce the oversupply”, said analysts at Commerzbank in a note.

Meanwhile U.S. gasoline stockpiles rose by 10.6 million barrels last week, the biggest build since 1993, according to Energy Information Administration data.

“But the equity markets selloff is more pressing and hard to ignore because of the impact of China on the global economy and overall demand for oil”.

After staging a 7 percent nosedive in Shanghai, stocks plunged by 4.3 percent in Frankfurt, 3.2 percent in Milan, 2.5 percent in Paris, and 2.4 percent in London on January 4.

Concerns about slower growth in China stalling the world economy, the same fears that caused Wall Street to lose almost 300 points on Monday, also kept oil prices down.

“Shale (oil) production and increasing capacity from countries like Russian Federation 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. Chinese teapot refiners are eying the lower crude oil prices and higher crack spread.

“Geopolitical tension presents the greatest upside risk to the crude market, at least through the first half of the year”, said Matt Smith, an analyst for energy database Clipper Data.

Saudi Arabia, the largest producer in OPEC, won’t limit production and will seek to supply any demand from the market, Ali Al-Naimi, the country’s oil minister, said Dec 30 on state television.

Tensions between the two major oil producers over Saudi Arabia’s execution of a prominent Shiite cleric have erupted into a full-blown diplomatic crisis after Riyadh and its Sunni Arab allies cut or reduced ties with Iran, which sparked global concern.

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.

Analysts said that the huge USA storage overhang was the main reason for falling WTI crude.