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Asian markets extend rout as oil sinks below US$28

Oil prices plunged below US$28 a barrel early Monday, hitting energy firms and extending a rout across Asian markets after sanctions were lifted against Iran, allowing the key producer to resume crude exports.

[HONG KONG] Oil prices plunged below US$28 a barrel early Monday, hitting energy firms and extending losses across Asian markets after sanctions were lifted against Iran, allowing the key producer to resume crude exports.

While the decision to free Tehran of the strict embargoes had been well telegraphed, the news hammered Middle East equities Sunday, which were already under pressure as the price of oil sits at 12-year lows.

The United States and the European Union lifted the sanctions at the weekend after the UN's atomic watchdog confirmed Iran had complied with its obligations under a landmark deal last year to curb its nuclear programme.

The country is now free to start shipping crude, adding to a supply glut, which – along with weak demand and a slowing global economy – has slashed prices by about three quarters since mid-2014.

On Monday a barrel of Brent oil fell 4.4 per cent to US$27.67 at one point before bouncing back above US$28. The last time Brent closed below US$28 was in November 2003 and Nomura Holdings is tipping further falls towards US$25.

In afternoon trade Brent was down 2.8 per cent at US$28.15 and US benchmark West Texas Intermediate was 2.6 per cent off at US$28.70.

"There is ongoing negative pressure on oil prices from oversupply," Ric Spooner, a chief analyst at CMC Markets in Sydney, told Bloomberg News.

"Iran is not new, but we've arrived now at the point where sanctions have been removed and it's going to be a key focus for the markets over coming weeks. The question is how much supply can come online in the short term." 

Singapore’s DBS Bank said in a research note that adjusted for inflation oil was now cheaper than at any time since 1998, at the height of the Asian financial crisis.

The news was met with horror in Gulf trading, with stock markets in Saudi Arabia, Qatar, Dubai, Abu Dhabi and Kuwait all battered.

Most Asian equities followed suit, with Tokyo closing down 1.1 per cent near one-year lows, Hong Kong ending 1.5 per cent lower, Sydney shedding 0.7 per cent by the end and Wellington 1.1 per cent lower.

There were also sharp losses in Manila and Jakarta.

But Shanghai again swung in and out of positive territory, having plunged almost nine per cent last week. The benchmark index ended 0.4 per cent lower.

Energy firms were among the big losers, with CNOOC in Hong Kong down 4.5 per cent and PetroChina shedding 2.1 per cent.

Sydney-listed mining giant BHP Billiton was 2.9 per cent lower and Woodside Petroleum retreated 2.6 per cent. Inpex slipped 1.5 per cent in Tokyo.

The Chinese market was given some support by the People's Bank of China's decision to increase the yuan currency's rate against the dollar. The yuan's recent weakness has been a key contributor to a rout in global markets that has characterised the start of 2016.

In a bid to prevent cash outflows which have also hit the yuan, the PBoC said Monday it would require foreign banks to hold reserves of the currency.

Overseas lenders have until now been set a reserve requirement ratio – the amount of depositor funds they must keep aside – of zero. But from next week they will be subject to similar rules as domestic lenders, which are as high as 17.5 per cent.

Markets are now nervously awaiting the release Tuesday of Chinese economic growth data, with analysts surveyed by AFP forecasting the slowest rate in 25 years.

Worries about the state of China’s economy have hit markets from Asia to the Americas over the past two weeks, with Beijing’s ability to handle the crisis being brought into question.

In early European trade London slipped 0.1 per cent while Frankfurt declined marginally and Paris edged up slightly.