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It turns out that thanks
to a glut of crude, even tension between two big oil-producing countries isn't
enough to drive prices higher. Oil futures spiked briefly on Monday after the
news that Saudi Arabia would cut diplomatic ties with Iran, a development that
could be seen as a threat to oil supplies.
Associated Press report continues:
Investors
quickly discounted those fears, however. After rising by US$1.35, the price of
benchmark U.S. crude ended the day down 28 cents to US$36.76 a barrel on the New
York Mercantile Exchange. Brent crude, reflecting the price of international
oils, dipped 6 cents to close at US$37.22 a barrel in London.
While
oil markets were see-sawing, stock markets sagged on evidence that the global
economy might be weaker than expected this year. The Dow Jones industrial
average lost 276 points, or 1.6 percent, and was down 468 points earlier in the
day.
New
reports indicated that manufacturing is continuing to struggle, with factory activity
falling in December for the second straight month in the U.S. and the 10th
straight month in China.
Slow
growth means that the current oversupply of oil could be more stubborn than
expected. Government figures show that the stockpile of U.S. crude oil grew by
2.6 million barrels during the week ended Dec. 25 and were 9.9 million barrels
higher than a year ago.
Oil
prices are likely to remain about where they are until either production drops
or the world economy perks up and drives demand higher.
Investors
may have regarded the flash of tension between the Saudis and the Iranians over
Saudi Arabia's execution of an opposition Shiite cleric as merely
saber-rattling. Stewart Glickman, an analyst with S&P Capital IQ, said
geopolitical risk has lost some of its ability to influence on oil prices.
"It
is maybe a sense of security from the marketplace that with this seeming glut
of crude oil that you can have tensions in Middle East and they don't count for
as much as they used to three or four years ago," he said in an interview.
The
explanation lies partly in robust production from the U.S., Glickman said.
Saudi officials are reluctant to cut production in a bid to raise prices
because they'll just concede sales to U.S. producers who will fill the void in
supply.
Iran
wants to regain some oil exports that it lost while under economic sanctions,
soon to be lifted, for its nuclear program. Judith Dwarkin, chief economist at
ITG Investment Research, said that the confrontation with Saudi Arabia makes
the Saudis unlikely to offset Iranian increases by trimming their own
production — potentially adding to the glut.
Then
there is the question of demand. Weak manufacturing numbers and a plunge in the
Shanghai Composite stock index raised new concern about energy demand in China,
the world's second-biggest economy.
The
U.S. Energy Information Administration forecasts that the average price of U.S.
benchmark crude this year will rise about 4 percent over 2015.
If
that is correct, American motorists will continue getting a break on gasoline
compared with prices not long ago. On Monday, the nationwide average price for
a gallon of regular was US$1.99, according to the auto club AAA — 22 cents
cheaper than a year ago.
The Energy Information
Administration estimates that the average U.S. household saved about US$660 on
cheaper gasoline last year, compared with 2014.
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