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Oil with a $US20s handle on the cards after latest sell-off

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Oil may soon be trading with a $US20s handle after collapsing again on Thursday, with barrels of benchmark Brent crude now trading at fresh 11-year lows.

Brent spiked over $US38.90 on Monday in a short-lived rally fuelled by a diplomatic dispute between fellow OPEC members Saudi Arabia and Iran.

But since then Brent has plunged 16 per cent to $US33.57 per barrel, surpassing its previous December lows of just over $US36.

It's now trading at levels last seen in 2004. 

NAB economist Vyanne Lai said concerns over China's economy – fuelled by two 7 per cent drops in the Chinese sharemarket this week following the devaluation of the Chinese currency – may have dragged the market down to its current lows.

"Trying to understand the rationale of short-term movements in the market isn't always easy," said Ms Lai.


Ms Lai said the rally in oil following the dispute between Iran and Saudi Arabia had probably not been justified.

"The reaction to the dispute was perhaps overwrought and now there's been a bit of a correction of that," she said.

"There hasn't been any signs that the dispute will impact the actual economic relationship between the two. Both countries have an eye on the bigger prize."

Ms Lai said oil could well sink into the $US20s, "but not for long".

"It's going to worsen in coming months, in terms of the glut being perpetuated," she said. "It's anyone's guess but there's probably downside to the current price levels. There's no guarantee it won't fall below $US30."

In addition to China's economic troubles, the relatively warm northern hemisphere winter – caused by El Nino – had reduced demand for heating oil, she said.

However, there were fundamental supply costs that would give oil a definite floor, she said.

"It's unlikely to stay in the high $US20s for a long time," she said.

"That's way below the break-even production costs for most producers."

Heavy sell-off

Australian energy companies have been heavily sold-off in Thursday trade, with Santos down more than 7 per cent, Woodside Petroleum 3 per cent and Oil Search 4 per cent.

Higher-than-expected US oil inventories, meanwhile, added further selling pressure to the price of West Texas Intermediate crude, which was selling for just $US33.18 per barrel.

Supplies in Cushing, Oklahoma, the delivery point for WTI crude, climbed to an all-time high of 63.9 million. Stockpiles at Cushing, which is also the biggest US oil storage hub, rose 917,000 barrels in the week ended January 1, according to the Energy Information Administration.

Crude output rose by 17,000 barrels a day to 9.22 million, the highest since August. That's down from a four-decade high of 9.61 million reached in June, weekly data show.

A sharp rise in gasoline stocks in the US also reinforced the picture of a market that is awash with oil and refined products. 

"The spectacular build in gasoline supplies is just going to crush the market," said John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy. "The gasoline build colours everything. Even with the inventory decline we have a surfeit of crude."

David Lennox, an analyst at Fat Prophets in Sydney, said "the trend for oil is down in the near-term."

"The high inventory numbers, the high supply numbers, the uncertainty in demand is still there."

Oil capped the biggest two-year loss on record in 2015 as OPEC effectively abandoned output limits amid a global glut.

Analysts from Citi to UBS predict crude may fall near $US30 over the next few months, while US crude stockpiles remain about 100 million barrels above the five-year average.