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

Oil price: five reasons why oil has re-entered a bear market

08 July

Oil re-entered a bear market yesterday as the price for Brent Crude, the international benchmark, recorded its largest one-day loss since February.

On Monday, the oil price fell by six per cent and it has continued to dwindle, reaching $55.40 a barrel at around 8am BST today. The price of Brent has now fallen by more than a fifth since it hit a year-high of $69.63 a barrel in May. Bear markets are commonly defined as occurring when prices fall 20 per cent from their peak.

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So what is causing the slide?

The Financial Times identifies five key factors behind the falling oil price. The first is the Iran nuclear deal, which is expected to be completed by the end of the week. If it goes through, it is likely that sanctions limiting Tehran's ability to trade oil will be lifted, which could add up to 800,000 barrels a day to the market within a year.

The second factor is China's economic slowdown, which will affect demand. "When China's economy wobbles, the oil market is quick to respond", the FT says. Carsten Menke, a commodities analyst at Julius Baer echoes the FT's analysis, noting that "commodity markets are signalling broad-based concerns about Chinese demand and the government's ability to stimulate growth".

Another factor causing oil to re-enter a bear market is the ongoing turmoil in Greece. The country's No vote in last Sunday's referendum on whether to accept the latest bailout package has catapulted the country into a new period of uncertainty. While the country's difficulties are unlikely to have a direct impact on demand for oil, they have led to a gradual strengthening of the US dollar. As the FT notes, "commodities like oil that are priced in dollars tend to move inversely to the US currency".

Fourth is the unexpected resilience of the US shale gas market which has proved itself to be more immune to lower oil prices than many analysts expected. Shale gas production in conjunction with oil coming from traditional sources has contributed to a global glut that has pushed energy prices down.

Finally, Opec's refusal to curb its own output has contributed to oil inventory levels in Western Europe hitting their highest levels in two years.

So can we expect to see the oil price rebound? Possibly, say analysts at consultancy Facts Global Energy, but not any time soon: "Low prices will eventually cure low prices. But we must not get too excited too quickly," they said in a note.