Oil drops to 11-year low amid Middle East turmoil

Oversupply put pressure on global crude oil markets, but tightening USA crude oil supply due to the removal of the export ban strengthened WTI crude oil prices.

The furore over Saudi Arabia’s execution of a Shi’ite cleric has stripped almost 8 per cent off the price of oil in the last three trading days, killing speculation that OPEC members might agree to production cuts to lift prices. Meanwhile, West Texas Intermediate crude prices for February delivery was up 45 cents, or 1.35 per cent, at Dollars 33.72, while Brent crude for February, rose 41 cents, or 1.21 per cent, to USD 34.16 a barrel on the New York Mercantile Exchange.

The global oil market has suffered a calamitous start to 2016, tumbling also in response to a vast supply glut that has plagued prices in recent years.

Risk aversion has also been rising after the Chinese government allowed the yuan to fall at a faster pace than expected, sending a signal to traders that China’s economic health was deteriorating, said Gordon Kwan, the regional head of oil and gas at Nomura.

The selloff was fueled in part by worries about Saudi Arabia’s cutting of diplomatic relations with Iran, which briefly sent oil prices surging, traders said. “Crude oil oversupply is still in play; however the deficit between demand and supply is getting smaller”, said Daniel Ang, an investment analyst at Phillip Futures, in a note on Wednesday.

On Thursday, European benchmark Brent North Sea crude oil for February slumped to US$32.16, a low last seen on April 7, 2004.

“As big as the crude oil drawdown was, the build in gasoline was even more spectacular and crushing to the market”, said John Kilduff, a partner at Again Capital, an energy hedge fund in NY.

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

Here’s a breakdown of what’s pulling the WTI crude oil price today lower… “Oil demand growth remains relatively strong heading into 2016 with a forecast gain of 1.2 million b/d for the year”, the report says. Saudi Arabia produced 10.2 million barrels a day in November, constituting about 11% of worldwide output.

The clash between Saudi Arabia and Iran comes as Tehran, which holds some of the largest proven reserves, hopes to ramp up oil exports once sanctions come off against Iran’s controversial nuclear programme.