Oil price skids on oversupply fears and weak world economy

December 19, 2018 | 11:07
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World oil prices tumbled on Tuesday (Dec 18) to strike their lowest levels in more than a year, hit by fears over the outlook for the global economy and doubts over producers' resolve to cut output.
oil price skids on oversupply fears and weak world economy
File photo of section of an oil platform in the North Sea, around 160 kilometres east of Aberdeen, Scotland. (Photo: AFP/POOL/ANDY BUCHANAN)

Reports that non-OPEC producers Russia and the United States were pumping oil at record levels wrong-footed many investors who not long ago had bet on a sharply rising market.

Fears that Iran sanctions reimposed by Washington would cause a drastic fall in output, and a corresponding surge in prices, underpinned oil at the start of the quarter, said David Cheetham, chief market analyst at xtb.

"But these concerns now look badly misplaced and it seems that a lot of people were caught on the wrong side in looking for US$100 a barrel crude once more," he said.

On Tuesday, the main oil contracts were worth only around half that.


Brent crude tumbled as low as US$56.97 in the late European afternoon, a drop of over four per cent on the day, while US benchmark WTI plummeted well over five per cent to a US$47.32 low.

Such lows were last seen in the autumn in 2017.

On Wall Street, the Dow saw a modest rebound after Monday's rout, but stock markets remained subdued in Europe.

"Stocks have not been the only victims of broader market misery this festive season," said Oanda analyst Craig Erlam.

"Oil tumbled ... as equities plunged into the red as investors continue to view 2019 as a challenging year for global growth."

There are also questions about the impact of a recently promised output cut by OPEC and other top producers including Russia.

"OPEC may have come to an agreement with its allies to cut production next year and rebalance markets ... but traders are clearly not convinced enough will be done," predicted Erlam.


Analysts also cited reports saying that Russia was pumping oil at record levels "which raises concerns surrounding their intentions to follow through on their promises to cut output alongside OPEC members", said Cheetham at xtb.

"The organisation often suffers from an intriguing aspect of game theory where all countries want to see production cut to support the oil price, but rarely does a country want to cut themselves for loss of revenues," he said.

Crude prices have fallen about a third from four-year highs touched at the start of October.

Asian equities posted sharp losses earlier in the wake of Monday's Wall Street selloff, as investors also awaited the US Federal Reserve's interest rate decision due later this week.

The British stock market meanwhile remained beset with worries over the nature of the nation's looming exit from the European Union next March.


"There is a lot of pessimism in the markets right now," said Erlam.

Dealers across the world have taken fright over a range of issues, including the China-US trade war, falling oil prices, political uncertainty, China's stuttering economy and geopolitical tensions.

Also weighing on confidence has been the Fed's monetary tightening drive that has seen it lift interest rates through the year, making it more expensive to borrow cash for investment.

The US central bank concludes its latest policy meeting on Wednesday and is widely expected to announce another hike.

US President Donald Trump on Tuesday once again hit out at the bank and called on it not to lift rates again.

Key figures around 1640 GMT:

Oil - Brent Crude: DOWN US$2.53 at US$57.08 per barrel

Oil - West Texas Intermediate: DOWN US$2.88 at US$47.33 per barrel

London - FTSE 100: DOWN 1.1 per cent at 6,701.59 points (close)

Frankfurt - DAX 30: DOWN 0.3 per cent at 10,740.89 (close)

Paris - CAC 40: DOWN 1.0 per cent at 4,754.08 (close)

EURO STOXX 50: DOWN 0.8 per cent at 3,040.13

New York - Dow: UP 0.8 per cent at 23,788.79

Tokyo - Nikkei 225: DOWN 1.8 per cent at 21,115.45 (close)

Hong Kong - Hang Seng: DOWN 1.1 per cent at 25,814.25 (close)

Shanghai - Composite: DOWN 0.8 per cent at 2,576.65 (close)

Euro/dollar: UP at US$1.1366 from US$1.1348

Dollar/yen: DOWN at 112.50 yen from 112.87 yen

Pound/dollar: UP at US$1.2635 from US$1.2624 at 2200 GMT


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