Oil fell to a seven-year low on Monday and close to the levels hit during the financial crisis amid increased expectations of a persistent oversupply in crude.
The renewed pressure on oil prices comes amid widespread expectations that the US Federal Reserve will raise rates tomorrow for the first time in nearly a decade.
Cheaper energy costs are a boon for consumers and the broader economy. However, the prolonged slide in oil is hurting highly indebted US shale drillers and the banks that lend to them.
“The year is ending on an uncomfortable note. The smell of fear is back in the air,” said David Hufton of London-based broker PVM.
Brent crude dropped $1.60 to $36.33 a barrel – the lowest in seven years – edging closer to the December 2008 intraday low of $36.20 a barrel. If Brent falls below this, it will hit a level last seen in the middle of 2004.
The global benchmark, which had been declining for its seventh consecutive session, rebounded in afternoon trading to $38.20 a barrel.
Oil prices have tumbled since the meeting of Opec ministers at the start of the month. Brent has plunged as much as 17 per cent while West Texas Intermediate, another benchmark, is down 16 per cent. Discord within the group on which members should make production cuts to shore up the price led to the continuation of Opec's policy to keep on pumping.
Ceiling scrapped
In addition, the group scrapped its official production ceiling and took away any pretence of output constraint.
“The Opec meeting has removed any last hopes of a reprieve for oil and it has added another layer of downside sentiment to commodities in general. The dam has collapsed and prices are in freefall, with devastating consequences,” said Mr Hufton.
Despite weakening production growth outside Opec, members of the producers’ group have ramped up output in the face of lower oil prices.
Iraq and Saudi Arabia have pumped at record levels this year, while oil market participants are eyeing the appearance of additional barrels from Iran when sanctions linked to its nuclear programme are expected to be lifted next year.
Prices sank on Monday when an Iranian official said there was “absolutely no chance” his country will delay its plan to boost shipments .
The International Energy Agency, the leading energy forecaster, said oil stockpiles are expected to swell throughout next year, albeit at a slower pace than in 2015.
“Gloom is nourishing gloom on the oil market,” said Carsten Fritsch at Commerzbank. The sell-off has taken on “ludicrous dimensions”, he added.
The weakness in crude has spread to some oil products, hitting prices. Refineries that have been working hard to meet demand for petrol have also produced more diesel than is needed.
– (Copyright The Financial Times Limited 2015/Bloomberg)
