Oil Falls to 12-Year Low as IEA Says Supply Could `Drown' Market

Middle East Oil Turmoil as Iran Re-Enters Global Market
  • Crude prices may fall further as demand growth slows, IEA says
  • Agency cuts 2016 global demand outlook, raises non-OPEC supply

Crude dropped to the lowest in more than 12-years in New York after the International Energy Agency said the global market could “drown in oversupply.”

West Texas Intermediate futures fell 3.3 percent. The IEA cut 2016 estimates for global oil demand as China’s economic growth weakens, and raised forecasts for output outside the Organization of Petroleum Exporting Countries. The removal of restrictions on Iranian crude sales is seen prolonging the supply glut. Brent futures rebounded as data showed Chinese growth was in line with government targets.

"There’s just too much oil out there," said Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston. "While we’re not going to be getting any deliveries of Iranian crude, they will displace other oils which will head here. There’s no light at the end of the tunnel."

Oil is down 23 percent this year amid volatility in Chinese markets and an expected surge in Iranian exports. The International Monetary Fund cut its world growth outlook for 2016 to 3.4 percent from 3.6 percent as the commodities slump and political gridlock push Brazil deeper into recession, plunging oil prices hobble Middle East crude producers, and the rising dollar curbs U.S. prospects.

WTI for February delivery, which expires Wednesday, slipped 96 cents to close at $28.46 a barrel on the New York Mercantile Exchange. It was the lowest settlement since September 2003. The more-active March future decreased 82 cents to $29.57. Monday’s transactions were booked with Tuesday’s because of the Martin Luther King Jr. holiday. Total volume traded was 68 percent higher than the 100-day average at 2:45 p.m.

Brent Movement

Brent for March settlement climbed 21 cents, or 0.7 percent, to end the session at $28.76 a barrel on the London-based ICE Futures Europe exchange. The contract fell 1.4 percent to $28.55 on Monday, the lowest close since December 2003. Brent closed at an 81-cent discount to March WTI.

While non-OPEC supply is set to drop 600,000 barrels a day in 2016, Iran’s comeback could fill that gap by the middle of the year, according to the IEA. As a result, world markets may be left with a surplus of 1.5 million barrels a day in the first half.

Iran’s Oil Ministry gave directions to increase output by 500,000 barrels a day after international sanctions were lifted, its news agency Shana said. Neighboring countries will pump more within six to 12 months and take away Iranian market share if it doesn’t boost production, said Roknoddin Javadi, managing director of state-run National Iranian Oil Co., according to Shana.

OPEC Projections

OPEC has forecast a steeper drop in supplies from rival producers this year as prices slump. Output outside the group will fall by 660,000 barrels a day, the group said Monday in its monthly market report, deepening the decline from its previous estimate by 270,000 barrels a day.

U.S. crude stockpiles probably rose 2.75 million barrels last week, a Bloomberg survey showed before a report from the Energy Information Administration on Thursday. The EIA data is projected to show that supplies of gasoline and distillate fuel also climbed.

"The fundamental reality is that the market is way oversupplied," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "We’re not going to get a sizable rebound on fundamentals anytime soon."

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