TOKYO, 9 Feb 2018:
Oil prices fell for a sixth day after Iran announced plans to boost production and US crude output hit record highs, adding to concerns about a sharp rise in global supplies.
Brent futures were down 38 cents or 0.6% at US$64.43 a barrel this morning. Brent fell 1.1% yesterday to its lowest close since Dec 20.
US West Texas Intermediate (WTI) crude was down 54 cents or 0.9% at US$60.61, having settled down 1% in the previous session at its lowest close since Jan 2.
Both contracts have fallen more than 9% from this year’s high point in late January.
“Bets on further rising oil and metals prices, for example by hedge funds, have climbed to excessively bullish levels,” said Carsten Menke, commodities research analyst at Swiss Bank Julius Baer. “We see oil prices dropping towards and below US$60 per barrel.”
OPEC member Iran yesterday announced plans to increase production within the next four years by at least 700,000 barrels a day.
Meanwhile, the US Energy Information Administration (EIA) this week said crude production last week rose to a record high of 10.25 million barrels per day (bpd).
At that level, US production would overtake current output in Saudi Arabia – the biggest producer in the Organization of the Petroleum Exporting Countries.
OPEC and other producers, including Russia, have cut production since January 2017 to force down global inventories, but these cuts have been offset by rising US oil production.
The falls come amid a rout in global share markets as inflation fears grip investors, after Wall Street shares suffered yet another big slide in the face of rapidly-rising bond yields.
“The correction phase in equities could last through February and possibly into March,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.
“The rise in long-term US yields will have to settle for the correction phase to end. The surge in volatility has also prompted investors to sell risk assets, in turn feeding volatility.”
US markets remained the epicentre of the global sell-off, with the Dow plunging 4.1% and the S&P 500 sinking 3.7% overnight.
With yesterday’s losses, both the S&P 500 and the Dow slid into correction territory – falling more than 10% from Jan. 26 record highs and showing the dust was yet to settle from the slide that began a week ago.
US stocks began to wobble last Friday after a healthy US labour market report sparked a spike in bond yields and fears of rising inflation which could trigger more central bank rate hikes.
Higher yields are seen hurting equities as they increase borrowing costs for companies and reduce their risk appetite. They also present a fresh alternative to investors who may reallocate some funds to bonds from equities.
Treasury yields have been pushed up by the prospect of increased debt issuance to fund fiscal spending under US president Donald Trump, inflation worries and expectations of the Federal Reserve raising rates – sooner and more frequently than was expected.
“An increase in fiscal spending ahead of the US midterm elections has caused the Fed to brace for inflation accelerating and the economy overheating. This led yields higher, ultimately triggering the fall in equities,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities in Tokyo.
It could be up to new Fed chair Jerome Powell to restore calm in the financial markets, he said.
– Reuters