Oil prices plunge to 12-year low

An oil pump jack can be seen in Cisco, Texas.
An oil pump jack can be seen in Cisco, Texas. PHOTO: REUTERS

Fresh market turmoil centred on China and supply glut are to blame; Iranian-Saudi spat dims prospects for output cuts

LONDON • Oil prices dived to the lowest point in 12 years, pummelled by fresh market turmoil centred on China as well as a chronic global supply glut.

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

New York's West Texas Intermediate for February delivery tanked to US$32.10 a barrel at about 0740 GMT yesterday (3.40pm Singapore time), the weakest level since Dec 29, 2003.

Oil prices have plunged 12 per cent since Tuesday - the worst three-day run in a year as the ongoing row between key producers Iran and Saudi Arabia dims prospects for output cuts.

Brent oil will slump to US$30 in the next 10 days, according to Nomura Holdings, while UBS Group sees an oversupply pushing prices even lower.

FURTHER PLUNGE POSSIBLE

Oil prices could go even lower, and it just underlines the uncertainty.

STATOIL CEO ELDAR SAETRE

"Most people are probably surprised that oil prices would go to this level," said Statoil chief executive officer Eldar Saetre in an interview in Oslo.

"They could go even lower, and it just underlines the uncertainty."

Oil slumped once more yesterday after the People's Bank of China weakened the yuan by 0.51 per cent to 6.5646 against the United States dollar, the lowest since March 2011, in a bid to help exporters.

The drop was the biggest since last August, when the value was cut by 5 per cent in a week - sparking weeks of global market turmoil over worries that Beijing did not have a handle on its economic crisis. The outlook for China is crucial for oil prices because the nation is the world's second-biggest economy and the key driver of commodities consumption.

Demand for crude oil also tends to fall when the US dollar is stronger against the currencies of purchasing countries.

"China's economic woes appear to be deeper than earlier believed and Saudi-Iran tensions just added insult to injury," Mr Mohammad Zidan, chief market strategist at Kuwait's Orbex Brokerage, told Agence France-Presse.

Commerzbank analyst Carsten Fritsch said in a research note to clients that futures were hit also by official data on Wednesday revealing a 10.6 million barrel increase in US petrol stocks - the biggest weekly rise since 1993 - to 232 million barrels.

Nationwide oil stocks climbed to a record 2.1 billion barrels, including the strategic petroleum reserve.

"Oversupply will continue to hold down commodity prices in 2016," said Mr Terry Marshall, a senior vice-president at Moody's.

"Opec (Organisation of Petro-leum Exporting Countries) and many non-Opec oil producers continue to produce without restraint as they battle for market share. Increased production has vastly exceeded growth in oil consumption, including from major consumers like China, India and the US."

World stock markets also tumbled yesterday, in tandem with oil prices, as investors feared for the global economy on signs of a dramatic slowdown in China.

Financial markets were rattled after China suspended stock market trading for the second time this week, after Shanghai equities fell more than 7 per cent.

In more downbeat news, the World Bank lowered its global economic growth forecasts, citing emerging market weakness, which cast doubt on the strength of future oil demand, dealers said.

The bank cut its forecast for global economic expansion this year by 0.4 percentage point to 2.9 per cent, though that is still faster than last year's sluggish 2.4 per cent.

"The cut in global growth forecasts by the World Bank is certainly not a positive for oil demand and the supply glut shows no signs of bullishness for the price either," noted London Capital Group analyst Brenda Kelly.

AGENCE FRANCE-PRESSE, BLOOMBERG, NEW YORK TIMES

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A version of this article appeared in the print edition of The Straits Times on January 08, 2016, with the headline 'Oil prices plunge to 12-year low'. Print Edition | Subscribe