Oil plumbs new lows below $27 as oversupply woes persist

NEW YORK (Reuters) - U.S. oil prices crashed below $27 dollars a barrel on Wednesday for the first time since 2003, caught in a broad slump across world financial markets with traders also worried that the crude supply glut could last longer.

Oil tankers sit anchored off the Fos-Lavera oil hub near Marseille, France, January 19, 2016. REUTERS/Jean-Paul Pelissier

Oil has fallen more than 25 percent so far this year, the steepest such slide since the financial crisis, piling more pain on oil drillers and producing nations alike. Yet they keep pumping more oil into an oversupplied market.

Sure enough, fresh data from the American Petroleum Institute on Wednesday showed U.S. crude stocks rose more than expected last week. Crude inventories rose by 4.6 million barrels in the week to Jan. 15 to 485.2 million, well above analysts’ expectations for an increase of 2.8 million barrels, the industry group said.

Venezuela requested an emergency OPEC meeting to discuss steps to prop up prices, but other delegates dismissed the idea.

A Middle Eastern shipping firm became one of the first to resume direct business with Iran after international sanctions on Tehran were lifted at the weekend, a reminder of how quickly more oil may flow.

“The Iranians are clearly stepping it up to battle for market share in Europe,” said John Kilduff, partner at Again Capital LLC in New York. Not only is that a major market for Saudi Arabia and Russia, but U.S. oil is now flowing unfettered to Europe for the first time, “so it’s a battle royale.”

U.S. crude for February delivery, which expired at the end of the day, slid $1.91, or 6.7 percent to settle at $26.55. New front-month March futures fell nearly 4 percent on the day to close at $28.35 a barrel.

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The March futures contract fell 14 cents to $28.21 a barrel in post-settlement trading after the API data.

Brent futures for March delivery fell 88 cents to settle at $27.88 a barrel, a 2.7 percent loss after pulling back from a new contract low of $27.10. That was down a further 8 cents in after-hours trading.

The latest step lower, the 11th decline in 13 days for Brent, set off a new round of panic buying on bearish options, sending the oil volatility index to its highest level since early 2009 when the financial crisis was starting to ebb.

Bjarne Schieldrop, chief commodities analyst with SEB in Oslo, said a “very broad-based sell-off across assets and across the world” amplified pressure on oil prices.

World equities sank to their lowest level since 2013. The MSCI World Equity Index has dropped 11.1 percent in January, which if sustained would be the worst monthly loss since October 2008, the month after Lehman Brothers went bankrupt. [MKTS/GLOB]

At this point, analysts say, the oil market is being weighed down by falling equity prices and that is reinforcing the existing fears about global economic health.

On Tuesday, the International Energy Agency warned that the world could “drown in oversupply” of oil in 2016, with the lifting of sanctions against Iran allowing that country to add its exports to the global glut.

The sell-off triggered a further slide in shares of big U.S. shale drillers, as investors feared much of the sector would struggle to withstand a prolonged period with prices below $30. Continental Resources Inc fell as much as 18 percent before closing down 5.4 percent.

But oil prices may keep falling until traders see U.S. shale producers slowing production, said Schieldrop, referring to the desire of Saudi Arabia and other OPEC producers to protect market share from U.S. drillers.

Energy market watchers expect the global crude glut to persist through at least the end of this year, adding to stockpiles that in some places are testing tank limits.

The U.S. Energy Information Administration (EIA) will report official inventory data on Thursday.

Additional reporting by Libby George in London and Keith Wallis in Singapore; Editing by Frances Kerry and Lisa Shumaker