Brent Plunges to Year Lows as Iran Supply Dominates

Brent crude dropped to a new 12 year low on Thursday as the prospect of more oil supplies from Iran emerged, amid concerns over a world with glut supply and worries about global economic growth.

On the Intercontinental Exchange — Futures Exchange in London, internationally traded Brent slumped as far as $29.73, which is the lowest level since February 2004 and down more than 1.5 percent. After spending most of the Asian trading day in gloomy territory, it surged 17 cents at $30.48 per barrel.

Brent futures edged lower 19 percent since the start of the year, as continuous concerns over the health of the global economy fueled worries that a global supply glut may linger around for longer than expected.

On the New York Mercantile Exchange, West Texas Intermediate crude for February delivery climbed 43 cents at $30.91 after plunging earlier in the day.

United States oil is trading at a rare premium to Brent, reflecting the hit that the global benchmark is taking with potentially more crude from Iran flowing as sanctions enforced on the country for its nuclear program may be elevated on Friday.

It was the second consecutive day for Brent to plummet below $30 per barrel after West Texas Intermediate inched down that mark on Tuesday, followed by slight recovery of the losses.

Brent’s spread against the West Texas Intermediate crude contract tacked on 46 cents, compare to a gap of 20 cents by close of trade on Wednesday.

United States crude has been firmer relative to Brent lately, on signals that the United States oil market is likely to grow tighter after Congress’ decision to elevate a 40 year old ban on domestic oil exports.

According to a market analyst, “Perhaps $30 or just slightly below is acting as a little bit of a floor, but that being said that’s a straw in a hay barn in terms of positivity. The rest of the news is decidedly negative about oil.”

On the other hand, weekly supply data from the United States Energy Information Administration revealed that gasoline and distillate supplies in the United States surged sharply last week, highlighting worries over a sluggish demand for oil products.

Data indicated that crude inventories gained 234,000 barrels last week, much less than estimated, but still overshadowed by reported builds of 8.4 million barrels in gasoline and over 6 million in distillates, which includes diesel and heating oil.

The United Nation’s nuclear watchdog is likely to confirm on Friday that Iran has reduced cut its nuclear program as agreed upon with world powers, making way for sanctions to be elevated.

Global crude output is rising faster than demand after a boom in United States shale oil and after the Organization of Petroleum Exporting Countries opted last year not to slash production in order to defend market share.

Most energy analysts expect a global glut to exacerbate this year because of advancing production in North America, Saudi Arabia, and Russia.

As stated by a market strategist, “Iran’s return is likely to come sooner. Non-OPEC supply ex-US is lower, though the adjustments are not nearly steep enough to rebalance given the worsening demand outlook and higher OPEC supply.”

Iran also released 10 United States sailors on Wednesday after holding them in the previous day, bringing a swift end to an incident that had rattled sentiments ahead of the anticipated implementation of the nuclear deal.

Oil and gas projects, which cost $380 billion, have now been postponed or canceled since 2014 as firms reduce costs to survive the oil price downturn, including $170 billion of projects planned between 2016 and 2020.

The price drop intensifies the squeeze on working capital. It also makes effective cash management all the more important.

“Growth skeptics will of course attach downside, but they haven’t caught up with the ongoing rotation of growth away from heavy industry and towards the services sector,” an energy analyst noted.

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