US crude heads towards $27 as IEA warns market could 'drown in oil'

US crude prices extended losses Wednesday, heading towards $27 a barrel, as the International Energy Agency (IEA) warned that the oil market could "drown in oversupply".

West Texas Intermediate (WTI), the US benchmark, fell to levels last seen in September 2003, touching $27.49 at one point.

At around 0645 GMT, the February contract was trading at $27.55, down 91 cents, or 3.20 percent. Brent crude for March -- which briefly fell below $28 on Monday -- was 63 cents, or 2.19 percent, lower at $28.13.

Both contracts are at more than 12-year lows.

"The IEA report played a big part in the price decline," said Phillip Futures analyst Daniel Ang, adding that this underscored the current "bearishness in the market".

Prices have crashed about 75 percent since mid-2014, hit by a perfect storm of a supply glut, weak demand, a slowing global economy and a strong dollar.

And the IEA said Tuesday they would fall further this year as supply vastly exceeds demand, with major oil exporter Iran's return to the market offsetting any production cuts from other countries.

"Can it go any lower?" the IEA said. "Unless something changes, the oil market could drown in oversupply. So the answer to our question is an emphatic yes. It (Other OTC: ITGL - news) could go lower."

The market has been awash with supplies owing to high production levels in the United States and by the OPEC cartel, which last year rejected calls to slash output as it looks to maintain its market share.

The oil crisis has caused ructions across global markets, wiping trillions of dollars off valuations, with weak demand for the commodity signalling weakness in economies. The tumbling prices have also led to major energy firms scaling back or cancelling investment and projects, and laying off thousands of workers.

"Clearly there is a further focus on the potential for Iranian additions to daily supply," said Michael McCarthy, chief market strategist at CMC Markets Australia.

"On top of that, there are further concerns that there's a stockpile to be cleared in Iran now that sanctions have been lifted," he told AFP by telephone from Sydney.

"Coming on top of a very fragile pricing environment, that's clearly had an impact."

Iran on Monday ordered a boost to crude production a day after the West lifted sanctions on the country in response to Tehran's compliance with a deal on curbing its nuclear programme.

Iran's National Iranian Oil Company said it had ordered an increase in output of 500,000 barrels per day. The country currently produces 2.8 million barrels per day and exports just over a million.

"It's the supply side that is getting the focus at the moment. The demand aspect is a longer term proposition for the market," added McCarthy.

"We're now outside fundamentals and for that reason it is very difficult to forecast where it will stop. When markets panic, they become unpredictable."