Global financial markets suffered a third day of new year turbulence after fresh fears over the health of China’s economy and tension between Saudi Arabia and Iran sent the price of oil plummeting to its lowest level in more than a decade.
In a move that motoring organisations said would trigger further cuts in petrol prices, the cost of Brent crude dropped by 5% during trading in London to stand at $34.60 (£23.66) a barrel.
Share prices were also down, with London’s FTSE 100 closing 64 points lower at 6,073 and New York’s Dow Jones industrial average dropping below the 17,000 level in early trading.
Oil’s slide began in east Asia, where Beijing’s decision to allow its currency, the yuan, to weaken prompted concerns in financial markets that China’s economy is performing much less strongly than suggested by official statistics.The selling then continued in Europe as dealers calculated that the tension between two of the world’s biggest oil producers – Saudi Arabia and Iran – would prevent the Opec cartel from agreeing on production cuts that might stabilise prices by bringing supply into line with demand.
The decline carried on in North America following news that US oil stocks had risen by 10% in the past week – the biggest increase since 1993. At one point, Brent crude was down almost 6% on the day at levels not seen since 2004. Analysts believe the price could tumble below $30 a barrel in the coming weeks.
“With the lack of a strong upward catalyst on the horizon, we are not out of the woods yet [on oil prices],” said Miswin Mahesh, an oil market analyst at Barclays Capital, adding: “Non-Opec production from the North Sea, Canada and Brazil is falling, but not quick enough at a time when demand is weak, partly due to a mild winter in the northern hemisphere.”New numbers showed the Chinese service sector growing at its lowest level for 17 months, while a fifth consecutive month of weaker manufacturing data led to a 7% fall in equity prices in Shanghai on Monday. The market subsequently stabilised after Beijing first suspended share dealing and then stepped in to the market to buy stocks.
Laura Eaton, analyst at the London-based consultancy Fathom, said Chinawas growing at 2.4% a year rather than the 6.9% indicated by official statistics. She added that the authorities in Beijing were likely to respond by allowing the currency to weaken further in order to boost exports, and by reducing interest rates from 4.35% to zero by the end of 2017.
“China has a longstanding problem of non-performing loans and while policy stimulus may stall the slowdown in growth, it is not going to solve the country’s long-term problems,” Eaton said. She estimated that unemployment, officially 4%, was currently 7% and likely to rise to 11%.
In the past, the Saudis have encouraged Opec (Organisation of the Petroleum Exporting Countries) to reduce its output targets during periods of low oil prices. This time it has stuck fast in what most market watchers believe is a deliberate attempt to drive competitors from the US shale fields out of business. This ploy has been only partly successful.
American output, which has surged in recent years, has remained relatively strong despite oil prices falling from their $115 peak in June 2014.
The growing rapprochement between the west and Iran has increased the likelihood of a huge rise in Iranian crude exports just as Iraq and other countries are ramping up output.
This has influenced price makers more than the growing standoff between Saudi Arabia and Iran over the recent execution of a Shia Muslim cleric and the terrorist attacks on Libyan oil storage tanks.
The tumbling oil price has made refined products, including petrol, cheaper. The average price of unleaded fuel fell by more than 4p a litre in December to 102.89p and reduced the cost of filling up a family-sized car by more than £2.
Four supermarkets cut their petrol prices to below £1 a litre last month and the RAC motoring organisation said on Wednesday that pump prices were likely to fall further.
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