Oil fell to its lowest levels in a year and a half on Thursday as a glut in supply and weak demand weighed on prices. But while Brent crude recovered some of those losses on Friday, the outlook for oil remains weak and sanctions imposed on Iran are likely to make matters worse, Dan Yergin, co-founder and chairman of energy research consultancy Cambridge Energy Research Associates (IHS CERA) told CNBC.
Speaking to CNBC from St Petersburg’s International Economic Forum, Yergin said that crude oil prices had dropped sharply because of a large build-up of supply and a lack of demand for the commodity, despite the oil security threat from Iran.
“Basically the Iranian security bid is gone from the price…and what’s dominating the market right now is this very large build-up of supply that’s occurred. Partly from Saudi Arabia very consistently putting oil out into the market, a build-up in Iraq and Libya and an astonishing increase in U.S. oil production which is up 25 percent since 2008” he said.
The U.S. believes that Iran is using funds from oil sales to fund its nuclear program and is leading a total of 18 countries that are cutting down or phasing out crude oil contracts from Iran in an attempt to stymie the Iranian oil economy and to force a change of policy. The EU is phasing out contracts by July 1 and similar measures go into force in June in the U.S at the end of June.
“Set all of that against the weak economic situation, weak demand on a global basis, worry about China and Europe and all of that means you have an oil price that is basically showing weakness and shrugging off the sanctions- even though we are only 2 weeks away from [the U.S putting into force] these very powerful sanctions on Iran.”
But Yergin told CNBC that producers would respond to the drop in oil price by cutting back and taking oil off the market. “It doesn’t work overnight, there’s skepticism” he said. “But then eventually it does work.”
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