Oil price posts two-year highs - but how long can it last?

Oil price resumes slide after US data prompts short rally

01 August

The oil price is resuming its downward trend after a significant recovery in New York on Friday evening prompted by a slump in the dollar.

International oil price benchmark Brent crude spent much of the earlier London trading session, the last of July, at around $42 a barrel, which would have equated to an overall monthly fall of 16 per cent, the worst so far this year.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

The figures convinced most traders the Federal Reserve will not increase interest rates at its September meeting, sending the dollar markedly lower. As oil is traded globally in dollars, this makes it cheaper in most markets and is a boon for demand.

This relief rally was always unlikely to last, however, given bearish sentiment on excess supply. Brent was on the move lower again this morning, to below $43 a barrel at around 11am in London.

Last week, there was a surprise rise in raw crude oil stockpiles in the US for the first time in two months, suggesting that returning production in Canada following wildfires have re-established a supply glut. Petrol stocks are also at record highs, indicating weak underlying demand.

Today, there are also reports that output from the influential 13-country Opec cartel will be significantly up in July. A poll by Reuters suggests it could be at its highest in "recent history".

Returning production in another country affected by disruption, Nigeria, is one reason for the assumed Opec hike. Iraq has also said its July production was 25,000 barrels per day higher for the month, to 3.2 barrels per day.

French bank Societe Generale remains of the view that supplies will come into broad balance in the second half of this year and first half of next year, with the oil price finding a floor in the high $30s.

Oil price continues to tumble – could it fall to $35?

29 July

The oil price has continued the steady decline it has been locked in all week, falling to near a four-month low this morning in London.

At around 10.30am the international oil price benchmark, Brent crude, was down 1.6 per cent at around $42 a barrel, having dipped below this threshold earlier in the session. This means it is at levels not seen since 8 April.

Its US counterpart West Texas Intermediate was down 1.1 per cent at $40.60 a barrel, it lowest since 19 April.

On the last trading day this month both are showing declines of around 16 per cent for the month as a whole, which would be by far the worst monthly decline for this year so far. Oil had been on a general upward trend since Brent hit a 13-year low of $27 in February.

Today's falls are a continuation of a sentiment hit from supply data on Tuesday and Wednesday, which pointed to slowing demand for raw crude and continued increases in petrol stocks.

In general traders are worried that returning output in areas affected by recent disruption, coupled with underwhelming global demand amid predictions of a slowdown in economic growth, is bringing back the spectre of oil oversupply.

Yesterday Goldman Sachs issued a note warning that the oil price will be rooted below $50 until mid-2017 and that risks to this forecast are "skewed to the downside", reports Reuters.

The relative strength of the dollar, which has risen four per cent since a nadir in June, is also weighing on oil, which is denominated in the US currency and so is made more expensive when it rises against international peers.

This could be the key factor behind other analyst forecasts for oil to fall as low as $35 a barrel, says Market Watch.

There are those who believe, though, that the negative shift has been "overdone".

ANZ bank said in a note to clients: "Investors have become overly bearish on oil as U.S. production and gasoline inventories continue to rise. We think those concerns are unwarranted. Underlying demand in the US remains robust."

Oil price and petrol stocks stuck in 'death spiral'

28 July

Oil prices took another hit last night and edged lower throughout London trading today after the latest set of bearish data on global supply.

Official data on US inventories showed a 1.7 million-barrel rise of raw crude stocks last week. Analysts had expected a tenth week of drawdown on reserves, at 2.3 million barrels, and a brutal bout of selling ensued.

US counterpart West Texas Intermediate was flat this afternoon at below $42 a barrel.

Following recent output disruptions in Canada and Nigeria, supply data is being keenly watched for signs of a return of a global glut that blighted the market for two years.

Beyond the headline numbers, traders have been watching petrol stocks, which have been surging to record levels as refineries cash in on cheap oil but demand remains insufficient to meet the resulting flood of refined-fuel products.

Official figures show US stocks of gasoline hit 241 million barrels last week, up 11 per cent on last year. Citigroup believes there are now 500 million barrels in storage worldwide, reports the Wall Street Journal.

Andy Lipow, the president of Texas consulting firm Lipow Oil Associates, told the paper the relationship between oil and gasoline prices is locked in a "death spiral".

As a result of the price remaining subdued, oil majors are taking a massive hit to profits.

A day after BP revealed its second-quarter earnings had fallen 44 per cent, rival Shell today announced its own had slumped more than 70 per cent, from $3.8bn (£2.9bn) last year to $1bn (£760m), reports The Times.

Could the oil price fall below $40 a barrel?

27 July

The oil price is still stuck near a recent near three-month low – and some analysts believe it could fall below $40 a barrel before the latest downward move is finished.

International oil price benchmark Brent crude dipped back towards $44 a barrel this morning in London, less than a dollar above its 9 May low.

Brent's US counterpart, West Texas Intermediate, was down 0.6 per cent at $42.60 a barrel, near its three-month low of yesterday. It is set to record an 11 per cent slide for July as a whole.

The trigger for the latest decline was American Petroleum Association figures showing an underwhelming 827,000 barrel draw on US crude oil stockpiles, adding to fears that the spectre of oversupply is returning to the market.

Focus in recent weeks has been on a glut of refined products suggesting falls in raw crude reserves overestimate demand. CNBC says petrol stocks are up ten per cent up from last year.

The World Bank issued its latest report on the sector yesterday, upping the estimate for the average oil price this year. But at $43 a barrel, the commodity is still expected to end 2016 lower than it is now.

Other analysts think things could be even worse.

Michael Wittner, the head of oil research at Societe Generale, said he believes there is a "soft floor" for oil at around $40 a barrel, but that it was possible it could fall further before hitting a bottom.

Analysts at Morgan Stanley said a return of US shale production could prompt a supply excess from August, which would push oil lower. It believes a bottom could yet be found in the mid-$30s.

Few expect a return to the ultra-bearish conditions from earlier this year, however, which prompted oil to slump to a 13-year low of $27 a barrel in February.

Oil price falls again to hit three-month low

26 July

Oil has continued on its downward trajectory as further evidence points to supply pressure building.

Brent crude hit a new multi-month low overnight before rebounding slightly. However, this morning, the slide below $45 a barrel continued and at 10am in London, the international benchmark was around $44.50, its lowest level since 10 May.

The BBC blames supply-related factors for the latest dip. In particular, figures from market intelligence firm Genscape show further increases in US production and a 1.1 million barrel increase in reserves at the primary US delivery hub in Cushing, Oklahoma.

US shale drilling has been picking up since the oil price rebounded from its 13-year nadir in February. Combined with recovering output from the likes of Canada, which saw disruption hit by wildfires earlier this year, this threatens to reinstate a global supply surfeit.

"Crude oil markets have been under pressure as oil supplies have started growing with the resumption of output… in the Canadian oil sands," said EY energy analyst Sanjeev Gupta.

Other reports have suggested a draw down on raw crude reserves overall but a resulting glut in refined products as demand fails to keep pace with processing. There is also a huge supply overhang left over, including record levels stored offshore in tankers.

BP's quarterly results today highlight the effects on some of the world's major blue-chip stocks from the oil price slump.

Profit in the past three months has fallen 44 per cent year on year to $720m (£550m), reports the BBC. Factoring in another £2.5bn after-tax charge related to the Deepwater Horizon oil spill, taking total costs to around £46bn, BP reported a loss of $2.2bn (£1.7bn).

Chief financial officer Brian Gilvary said: "We continue to reset our capital and cost base and are moving steadily towards our aim of rebalancing organic sources and uses of cash by 2017 in a $50-55 per barrel oil price range."