Oil fell to its lowest price in more than 11 years on Wednesday, down around 2 percent, as the row between Saudi Arabia and Iran is extinguishing any chance of the major producers cooperating and cutting production in the face of mounting global oversupply.
The furor over Saudi Arabia’s execution of a Shi’ite cleric has depressed the market, as it put an end to optimistic speculation that OPEC members could agree on production cuts – in order to decrease the supply and therefore lift prices through increased demand.
“There are rising stockpiles and the tension between Iran and Saudi Arabia makes any deal on production unlikely,” said Michael Hewson, head of strategy at CMC Markets.
Global Brent crude benchmarks were at $35.75 a barrel at 0856 GMT, down 67 cents or 1.9 percent from their previous settlement, their lowest since 2004.
US crude futures were down 46 cents at $35.51 per barrel after already slipping 79 cents the previous day.
Oil has slumped from over $115 in June 2014, as shale oil from the United States has flooded the market, while falling prices have prompted some producers to take an opposite approach; rather than decrease production, they have chosen to maximize output in order to prevent income from falling too rapidly and keep market share.
Adding to this oversupply, Iranian oil exports are widely expected to increase in 2016, as Western sanctions against the country for its alleged nuclear weapons program are likely to be lifted.
“Shale production and increasing capacity from countries like Russia who need to protect revenue, combined with expectations of further Iranian supply, mean actual production as well as expectations of future production are rising,” Hewson said.
Still, a senior Iranian oil official said that once the sanctions are lifted, the country would moderate oil export increases to avoid putting prices under further pressure.
In the United States, concerns over mounting supply levels persisted, with crude inventories likely to have risen by 439,000 barrels last week, according to a Reuters poll of eight analysts.