Cartel says persistent low prices will finally begin to bite for rival producers, as cost for some barrels of US crude turn negative
Oil slumped to below $28 a barrel in early morning trading on Monday - its lowest level since September 2003 - as traders digested news of Iran's return to the world's over-supplied markets.
Brent crude shed 1.3pc to fall as low as $27.70 before rebounding by more than 2pc to $29.
The slide came after Opec said persistently low prices would finally begin to bite for rival producers in 2016, forcing the US and Canada to cut back on production this year.
In its latest monthly review of the oil market, the group said non-Opec supply would shrink by 660,000 barrels a day this year, above previous estimates of just 270,000.
The forecast seemingly vindicates the cartel's landmark decision to ramp up production in order steal a march on higher cost producers such as US shale.
But shale drillers, as well as producers in Canada and Russia have proven resilient in the face of the 18-month price crash - which is now the worst in the post-war era. Non-Opec production grew by more than expected in 2015 to 1.23m barrels a day, said the report, which predicted that 2016 was finally the year markets began to rebalance.
Oil prices have collapsed by 75pc since the summer of 2014. Record stockpiles have also put pressure on the world's storage capacity, forcing prices into negative territory in some parts of the US. One major US refiner - Flint Hill Resources - said it would now charge producers -$0.50 a barrel for North Dakota South - a variant of crude.
Saudi Arabia has led the charge in maintaining output, producing 10.25 million barrels a day in December, a hike of 750,000 barrels a day from the end of last year.
Analysts said the price rout is expected to deepen as Iran has vowed to pump an additional 500,000 barrels a day following the formal lifting of its sanctions over the weekend.
International companies are now free to invest in the Islamic Republic's oil resources as the ban on currency conversions is lifted and Iranian oil is available to purchase on international markets.
"Independent oil companies are highly interested in low-cost oil assets," said Bjarne Schieldrop, chief commodities analyst at SEB.
"On the other side, Iran has indicated highly favourable investment terms for international oil companies."
But Tehran's need for huge investment in its oil industry means an immediate expansion of its production to pre-sanction levels is yet on the cards, said Al Stanton at RBC.
Iran has resisted calls from Saudi Arabia to hold back on production in a bid to stabilise the glutted oil market. The rift saw Opec fail to agree on a formal production target for the first time in its recent history in December.
Saudi oil minister Ali al-Naimi said he was "optimistic" that major producers would eventually come together to help rebalance the market.
“Market forces as well as the co-operation among producing nations always lead to the restoration of stability. This, however, takes some time," Mr al-Naimi said on Monday.
Saudi Arabia's oil minister Ali al-Naimi
Oman, which is the largest Gulf producer to sit outside Opec, said it was ready to co-operate and cut back on production if other nations also relented, according to its oil minister, Mohammed Al-Rumhy.
Opec said it expected oil demand to pick up this year, revising up estimates by 1.7m to 31.6m barrels a day.
Major producers are currently over-supplying markets by 2-2.5 million barrels a day, said Stuart Gulliver, chief executive of HSBC.
Mr Gulliver said he expected prices to stabilise at between $25 and $40 in a year's time.
A barrel of Brent is now likely to fall below $25 this year, according to the latest odds from Ladbrokes. The bookies have 10/11 on oil falling below $25, and 10/1 for a collapse to $10.
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