Oil prices give up earlier gains; languish near 11-year lows

This follows the execution of a prominent Shiite cleric, which led to a severing of diplomatic ties between the two countries. Gasoline stockpiles rose 10.6 million barrels last week, the most since May 1993, government data show.

Oversupply issue will be exacerbated further once Iran returns to the global oil market early next year after western-imposed sanctions are lifted.

“Lingering concerns about growing supply continued to outweigh the implications of rising tensions in the Middle East, ” ANZ bank said, referring to global production outpacing demand by hundreds of thousands of barrels every day.

However, OPEC is not to be trusted with the self-imposed quota, as it has a history of exceeding it as it looks to defend market share against non-OPEC producers, such as the United States and Russian Federation. The latest tensions between the two countries could change that outlook and have the “potential to stir up violence and conflict that could disrupt oil trade routes and supply, which would be bullish for prices”, he said.

US WTI light sweet crude is up 0.8 percent at 37.05 a barrel while Brent crude is also 0.8 per cent higher at Dollars 37.53 a barrel.

Concerns over economic weakness in China are also helping to keep prices lower as it would dampen demand in the world’s second biggest economy and top energy consumer, other analysts said.

“With increased geopolitical tensions between Saudi Arabia and Iran, the market has put a premium on prices just when markets opened (in 2016)”, brokerage Phillip Futures said on Monday. The group has exceeded its previous target of 30 million barrels a day since May 2014, data compiled by Bloomberg show.

Oil prices fell below $35 per barrel for the first time since 2004 on Wednesday, tumbling more than 5 percent as the row between Saudi Arabia and Iran made any cooperation between major exporters on cutting output even more unlikely.

According to Oslo-based consultancy Rystad Energy, global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22-percent fall to $595 billion in 2015.

“What was unexpected was the overwhelming inventory increase in gasoline and diesel fuel – the extent of the gasoline inventory build was a very big surprise”, said Andy Lipow of Lipow Oil Associates.

“Next year will be the year of under supply which means we should see at least an eighteen month bull market from the middle of this year”, it added.

The price plunge is causing countries that rely heavily on oil export revenues economic pain.