Oil prices dived to a 12-year low, falling under $28 a barrel in early Asia trade Wednesday, as a glut continues to weigh on markets.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in February CLG6, -3.76% traded at $27.56 a barrel, down 90 cents, or 3.2%, in the Globex electronic session. This is the lowest intraday level since September 2003.
March Brent crude LCOH6, -2.78% on London’s ICE Futures exchange fell 53 cents, or 2%, to $28.19 a barrel.
The International Energy Agency said in its latest report that oil prices will likely slide further this year as the market, under “enormous strain,” proves unable to soak up the extra oil from producers such as Iran. It sees the end of sanctions on Iran adding 300,000 barrels a day of crude by the end of the first quarter, reducing the effect of the 600,000-barrel-a-day reduction expected from producers outside the Organization of the Petroleum Exporting Countries.
The agency expects a third straight year of oversupply exceeding 1 million barrels a day — up to 1.5 million barrels a day in the first half of this year.
Global inventories, which rose by a notional 1 billion barrels in 2014-15, will grow a further 285 million barrels in 2016, the agency said, putting storage infrastructure under pressure, despite significant capacity expansion.
“A main reason for the big drop in U.S. oil price this morning is because the February contract is close to expiry so most traders have already closed their positions and started to trade on the March contract,” said Daniel Ang, a Phillip Futures energy analyst.
The March contract CLH6, -3.31% was down 90 cents at $28.68 a barrel on Nymex.
After sliding for nearly two years, oil prices are down more than 70% from their 2014 high. And with oil producers focusing on market share rather than on supporting prices, they will likely to stay depressed.
“Unless material production declines emerge in the next three to six months, it is hard to see much upside in the crude prices.” Citi
Prices have also been hurt by economic deceleration in China, the world’s second-largest user of crude. The market fears demand there may falter as the country shifts to a less energy-intensive economic model. On Tuesday, the Chinese authorities announced the country’s gross domestic product rose 6.9% in 2015, its slowest pace in 25 years.
“Unless material production declines emerge in the next three to six months, it is hard to see much upside in the crude prices,” Citi said in a report, pointing at the resilience of U.S. oil producers as a key factor in the prolonged bearishness.
Analysts polled by pricing agency Platts suggest a 2.9-million build in the U.S. crude stock in the week ended Jan. 15. U.S. oil production has been tapering off in recent months but the total inventory still stands at an eight-decade high.
Nymex reformulated gasoline blendstock for February RBG6, -0.77% — the benchmark gasoline contract — 57 points to $1.0205 a gallon, while February diesel traded at $0.8981, 106 points lower.
ICE gasoil for February changed hands at $262.00 a metric ton, down $8.50 from Tuesday’s settlement.