Monday, January 18, 2016

Oil Prices Fall Below $30 a Barrel

Oil resumed its seemingly inexorable slide on Friday with prices on both sides of the Atlantic slipping below $30 a barrel as investors braced for the full return of Iranian barrels to the market.

Amid expectations that sanctions linked to Iran’s nuclear programme could be lifted as soon as this weekend, Brent, the international oil marker, dropped $1.40, or more than 4.5 per cent, to a fresh 12-year low of $29.46 barrel.

Although Iranian officials had signalled towards the end of 2015 that sanctions could be lifted as early as January, oil market observers and western diplomats had said it would take months longer.Meanwhile, West Texas Intermediate, the US oil benchmark, fell $1.77 — almost 6 per cent — to $29.41. Both prices rallied on Thursday as speculators betting against oil closed some of their positions. Brent has had one of its worst starts to a year on record, falling 21 per cent.

“Signals now point to Iran reaching ‘Implementation Day’ at least two to four months sooner than we and the market initially expected,” said analysts at Barclays in a report.

Iran claims it will be able to increase production by 500,000 barrels a day immediately after the lifting of sanctions and within seven months reach its pre-sanctions level of at least 3.4m b/d.

While oil analysts believe these targets are hugely ambitious, any extra Iranian barrels hitting the market will add to a global supply glut that has pushed prices down more than 70 per cent since mid-2014. It could also delay the rebalancing of the market.

“Global macroeconomic concerns are mounting . . . Opec supplies are rising . . . and non-Opec supply is not adjusting fast enough, meaning that there is still further downside risk to prices this quarter,” the Barclays analysts said.

Demand was one of the few positives in the oil market last year as motorists enjoyed the benefit of lower prices at the pump. It is also one of the factors Saudi Arabia and its Gulf allies in Opec are banking on to rebalance a market that is oversupplied by at least 1m barrels day. The other is slowing output from high-cost suppliers such as US shale companies.In recent weeks further signs of a slowdown in China, whose growth led the rise in global oil demand over the past decade, have added fears of slowing consumption to massive oversupply.

On Friday BHP Billiton, the world’s biggest resources company, wrote down the value of its US shale assets by $7.2bn and placed its development plans on hold.

The extent of the oil market glut was also highlighted on Friday by Euronav, a leading operator of very large crude carriers (VLCC). These are vessels that are capable of hauling more than 2m barrels of crude around the world.“Oil and gas markets have been significantly weaker than the industry expected,” said BHP chief executive Andrew Mackenzie. “We responded quickly by dramatically cutting our operating and capital costs, and reducing the number of operated rigs in the onshore US business from 26 a year ago to five by the end of the current quarter.”

The company and its rivals have enjoyed a sharp increase in rates as producing countries have been forced to ship their crude longer distances to find customers.

Euronav said charter rates for VLCCs had averaged $62,000 a day in the fourth quarter, more than double the level of a year ago.

“Demand has been and continues to be solid,” the company said. “Vessel supply remains moderate with only a handful of confirmed additional newbuilding orders placed since the end of the third quarter 2015 and for delivery scheduled in 2018.”

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