Oil Prices Drop 3%

Oil Prices Drop 3%Oil Prices Drop 3%

Oil prices fell on Tuesday after the largest surge in crude prices was triggered by the OPEC's hint that it might cut production in future and the US lowered output estimates due to the prospects of increased Iranian oil exports.

Prices fell around 3% in Asian trade on Tuesday, with investors taking profits after Brent and US crude soared more than 8% in the previous session, Reuters reported.

Both Brent and US crude prices dropped nearly $2 a barrel shortly after trading in Brent started on Tuesday, before partly recovering later in the session.

"A lot of the fall was due to short-covering," said Ben Le Brun, market analyst at Sydney's OptionsXpress.

"There could be a bit of profit-taking for people who have gone long."

US crude, also known as West Texas Intermediate, had climbed 27.5% by the end of three days of gains in the previous session, the largest three-day increase in dollar terms since February 2011 and the biggest percentage increase over three days since August 1990.

The surge was fueled by a statement by the Organization of Petroleum Exporting Countries saying it was willing to talk to other producers to achieve reasonable oil prices, as well as by the downward revision of US output data by the US Energy Information Administration.

"[The OPEC statement] could be just a bit of politicking ... but it does suggest that many producers are likely to be hurting at these levels," ANZ said in a market report on Tuesday.

Anticipating the Iran Effect

OPEC's indications about possible cuts could be a way of dealing with the rise in Iranian crude exports once sanctions are lifted, Phillip Futures said in a note on Tuesday.

Low oil prices are putting pressure on exporters with bad fiscal balance sheets. Now with the Iranian oil export pickup in sight, OPEC, which produces about 40% of the world’s oil, is reevaluating the oil market and its producers may cut output in the near future, to make room for Iran.

However, the organization will not prop up oil prices by cutting supply unless non-member nations agree to share the burden, according to OPEC's bulletin.

Iran is expected to increase its output to reestablish its foothold in the oil market, following the lifting of sanctions against its nuclear program following its deal with the six world powers.

The commodity exporter is sweetening oil deal and talking with foreign investors to boost output. It is aiming for a 500,000 barrel per day increase to its current production.

For some analysts, it all comes down to Saudi Arabia, OPEC’s biggest producer. The Saudis led the way in maintaining production levels to preserve their market share, even as prices sank by more than half since the middle of last year, Bloomberg reported.

“Until Saudi Arabia says something, this is all meaningless,” Mike Wittner, head of oil-market research at Societe Generale SA in New York, said by phone. “Why would the Saudis change their logic and waste all they have already done?”