Oil prices extended their slide on Monday after the international community decided to lift sanctions on Iran over the weekend. The decision to ease sanctions against Iran comes after the International Atomic Energy Agency said in its report that Iran has fulfilled its obligations under last year’s nuclear accord that prohibits Iran from developing nuclear weapons.
Analysts estimate that Iran will be able to raise production by 500,000 barrels a day immediately after the suspension of sanctions. This would add to the existing supply glut in the market that has come about as major oil producers refuse to reduce production in an attempt to undercut each other. Increased production from Russia and a boom in US shale oil production has raised concerns of shrinking market share from the world’s largest producer, Saudi Arabia.
Oil futures hit 2003 lows as WTI crude futures hit a low of $28.36 a barrel, while Brent crude briefly fell below $28 a barrel to $27.67. A quick turnaround in prices is not expected but as US production takes a hit from cheaper producers in the Middle East, US crude imports are expected to recover, which should provide some support to prices. There may already be signs of this as WTI is currently trading at a premium over Brent for the first time since 2010, increasing the attractiveness of imported oil in the US.
The impact of the continued slide in oil prices spreads beyond the oil industry though as share prices across the globe have fallen sharply since the start of the year. The oil price war has added to the gloom in the markets with investors still concerned about the prospect of growth in China and in other emerging market economies. The wider slump in commodity prices has hurt emerging economies such as Brazil, Russia and South Africa, as well as caused a slowdown in resource-rich advanced economies such as Australia and Canada.
Further falls in the price of oil also risks triggering renewed deflationary pressures across the globe just when many countries are seeing inflation levels return to positive territory after a bout of falling prices. Some central banks have already adjusted their outlook for a prolonged period of low inflation but the US central bank, the Federal Reserve raised its main interest rate in December for the first time in nearly a decade on the basis that inflation is on track to rise towards 2% in the medium term. Fresh weakness in inflation and in global growth may prompt the Fed to delay an expected rate hike in March to June or later.
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