The Economy: Even with tensions, supply dictates price of oil

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DALLAS — A persistent glut of oil is trumping even Middle Eastern geopolitical tension, extending the slump in oil markets into the new year.

The price of oil fell 30 percent last year, following a 50 percent plunge in 2014. At below $36 a barrel on Tuesday, the price is down more than 2 percent early in 2016. Even heightened tensions between Iran and Saudi Arabia, two big oil-producing countries, failed to halt the slide.

Oil prices are likely to remain about where they are until either production drops or the world economy perks up and drives demand higher. The U.S. Energy Department expects the nation's production to drop by about 500,000 barrels a day this year, but OPEC has vowed to hold to existing production levels.

The price of benchmark U.S. crude was down 77 cents to $35.99 a barrel on the New York Mercantile Exchange in afternoon trading after falling 28 cents on Monday. Brent crude, reflecting the price of international oils, was down 2 percent on Tuesday after a smaller drop Monday.

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.

Hard to crack

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 was 9.9 million barrels higher than a year ago.

Surveys by Genscape show that stocks of benchmark U.S. crude near the key hub in Cushing, Oklahoma, are at all-time highs, said Brian Busch, director of oil markets for the energy-research firm. It's not limited to the U.S. Oil-storage terminals in South Africa are full, and China-bound tankers have been seen waiting offshore until there is room to offload their shipments of crude.

With little reason to expect stronger demand or cuts in production soon, investors seemed to discount the rising tension between the Saudis and Iranians over Saudi Arabia's execution of an opposition Shiite cleric. 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 for its nuclear program. Judith Dwarkin, chief economist at ITG Investment Research, said that the confrontation makes the Saudis unlikely to offset Iranian gains by cutting production.


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