Oil price falls to $US33

Brent dropped to $35.54, its first 11-year low, in early trade, but it recovered a little and at 9:45 a.m. GMT (4:45 a.m. ET) was down about 2%, sitting at $35.68 a barrel, just $0.15 above its earlier bottom.

Prices have since eased because “the market is still focused on the over supply issue”, said UOB senior economist Alvin Liew.

“(What happened) yesterday reflected the geopolitical risk and added to the volatility in the market but fundamentally we don’t believe that oil exports will be in near-term disrupted from any of this sort of geopolitical risk between Saudi and Iran”, said the bank’s regional head of oil and gas research, Scott Darling. “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.

With Brent and WTI still trading some two-thirds below theirmid-2014 highs, crude prices are likely to average around $50 a barrel amid the glut in global crude supplies, a Reuters poll of analysts showed.

In early trade, oil rallied after a breakdown in diplomatic ties between Saudi Arabia and Iran fed worries about Middle East crude shipments.

“Data suggest gasoline and distillate fuel stockpiles increased 10.6 million barrels and 6.3 million barrels, respectively, last week”.

After markets closed Tuesday, the American Petroleum Institute, an industry group, surprised market participants and said that US oil inventories fell by 5.6 million barrels in the week ended January 1.

“The statements at the weekend by (Iranian oil officials) that Iran would only increase production at the level of the market can absorb seems to be a shift in rhetoric”. [MKTS/GLOB] U.S. stock indexes lost more than 2 percent, with the Dow sliding more than 400 points.

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

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 after reaching a deal on its alleged nuclear weapons development programme.

“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. “We will raise our market quota steadily”, he continued.