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Oil market ‘could drown in oversupply’

The outlook for flattish growth for oil-exporter Russian Federation may need to be revised lower if oil prices stay below $30 per barrel.

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OPEC has forecast a steeper drop in supplies from rival producers this year as prices slump. “Global oil supply could exceed demand by 1.5 million bpd in the first half of 2016”, it reckons.

“The IEA, which issues regular reviews of the health of the energy market, said more price weakness could lie ahead as “… unless something changes, the oil market could drown in oversupply”.

Oil sank to a 12-year low of less than $28 a barrel in London on Monday as the removal of worldwide sanctions at the weekend freed Iran to revive crude exports.

Global financial markets seem to be overreacting to falling oil prices and the risk of a sharp downturn in China’s economy, Maurice Obstfeld, the International Monetary Fund’s chief economist said on Tuesday. Production including returning OPEC member Indonesia fell by 210,000 bpd to 32.18 million bpd in December, the report said, citing secondary sources.

These production cuts are the only “bullish side” for the oil market, the IEA said, with most other factors conspiring to keep the oil price under pressure.

The end of Iran’s economic isolation has escalated the price rout, with the Islamic Republic planning to pump out 300,000 barrels a day by March, said the IEA. The peaks in the pre- sanctions era were reached in 2011 to greater than one million barrels per day. The government claims its oil sector could churn out as much as 1 million barrels a day – double the world’s surplus – by the end of the year. The worldwide benchmark in this domain, Brent crude, improved to $28.86, BBC News notes.

That came after the International Energy Agency, which advises industrialized countries on energy policy, warned that oil markets could “drown in oversupply” in 2016.

The U.N. nuclear agency certified Saturday that Iran has met all its commitments under last summer’s agreement, prompting the lifting of a broad range of economic sanctions, including those covering the oil industry.

However, production from wells in shale formations typically drop off by up to two thirds in their second year. Saudi Oil Minister Ali al-Naimi dismissed supply concern with a forecast that prices will recover. “They are not going to give up the fight and say “welcome back”.

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Finally, global-demand growth for crude is declining. “The demand aspect is a longer term proposition for the market”, added McCarthy. As storage space on land becomes scarce, it may become profitable to stockpile excess crude on tankers at sea to accommodate the oil glut, the IEA said.

The oil bust likely will remain relentless as the IEA believes worldwide crude inventories which grew by 1 billion barrels in the 2014 to 2015 period could rise by 285 million barrels this year as Iran and its rivals put out more crude