The price of oil has fallen to its lowest level in 11 years as commodity markets responded to signs that the global glut of oil will deepen in 2016.
Dealers said the cost of crude was on course in December to register its biggest monthly fall since the collapse of the US investment bank Lehman Brothers in October 2008.
The latest fall in prices was prompted by concerns that a market already awash with oil from the two biggest suppliers – Saudi Arabia and Russia – would receive additional supply from the lifting of sanctions against Iran and the ending of a 40-year US export ban.
In London, the price of benchmark Brent crude hit a low of $36.05 (£24.22) a barrel on Monday, its lowest since 2004 and below the low point reached during the financial crisis of 2008-09.
Oil prices were also on the slide in early trading on the other side of the Atlantic, with US light crude dipping below $34 a barrel to its lowest level in six years.
While oil ministers from Qatar and Iraq sought to talk up the prospects of a recovery in the oil price, analysts said crude was likely to go lower in the short term, given that production is close to record levels at a time when demand has been affected by the slowdown in China and other leading emerging markets.
Oil prices have slumped by a fifth since a meeting of the Opec cartel on 4 December failed to introduce any curbs on production, and are down by almost 40% in 2015 so far.
Patricia Mohr, vice-president of cconomics and commoditymarket specialist at Scotiabank, said: “2016 will remain challenging for most commodity producers – with global growth expected to remain lacklustre at best. In particular, competition in oil markets could intensify in the first half of 2016, as sanctions on Iran are lifted.”
She added that the cost of US crude had continued to drift lower following the Opec meeting, which came at the end of a year that has seen the cartel increase supply by 1.4m barrels a day. Mohr said the oil price could drop to $30 a barrel in the near term. “Unlike previous experience, Opec did not even set a sales quota at the December meeting, with countries now largely producing at will,” said Mohr.
Iraq had increased production by 930,000 barrels a day since November 2014, while Saudi Arabia had supplied an additional 580,000 barrels a day.
Ole Hansen, Saxo Bank senior manager, said: “Really, I wouldn’t like to be in the shoes of an oil exporter getting into 2016. It’s not exactly looking as if there is light at the end of the tunnel any time soon.”
The investment bank Goldman Sachs has said that it could take a drop to as little as $20 a barrel for supply to adjust to demand.
The lower cost of crude has dealt a blow to economies of oil producers such as Nigeria, which faces its worst crisis in years, and Venezuela, which has been plunged into deep recession.
Even wealthy Gulf Arab states have been hit. Last week Saudi Arabia, Kuwait and Bahrain raised interest rates as they moved to protect their currencies.
Royal Dutch Shell and BP were among the top 10 biggest fallers on a quiet day for share trading in London. The FTSE 100 closed 17.5 points lower at 6035.
However, Shell said on Monday that it is pressing ahead with its $60bn takeover of BG Group despite doubts among some shareholders about the deal’s viability given the falling oil price.
Sentiment in continental Europe was more influenced by the inconclusive election result in Spain than by the latest decline in the oil price. Spain’s main stock market index, the Ibex 35, closed at its lowest for three months following a 3.6% fall on fears that a second election might be needed to form a stable government in Madrid. Germany’s DAX fell 1%.
Jonathan Loynes, chief European economist at Capital Economics, said: “The inconclusive result of the Spanish general election is set to trigger a period of political uncertainty which could slow the country’s economic recovery. But it also represents another blow to the eurozone’s policy of onerous austerity.”
This article was written by Larry Elliott, for theguardian.com on Monday 21st December 2015 19.39 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010