As the price of US oil slides to almost $40 per barrel, has it still got further to fall?
Alex Dryden, global market strategist at JP Morgan Asset Management, says Yes
With oil prices drilling multi-year lows, investors are asking how much further they can fall. Predicting the movement of oil is difficult even at the best of times.
However, a look at the supply and demand dynamics suggests that black gold could slide past $40 per barrel. Crude inventories in the US are at their highest level in 80 years, and storage units around the world are overflowing.
Such a dearth of storage capacity means that newly pumped oil is flooding into the physical market and pushing prices lower. This wouldn’t be a problem if it looked like big producers, like Saudi Arabia and the US, were about to pull back on the throttle – but neither looks likely to blink.
On the demand side, China’s economy seems to be struggling, while a stronger US dollar is damaging demand from other emerging economies.
Such unfavourable supply and demand dynamics mean that oil markets should get to grips with prices remaining lower for longer.
Iain Armstrong, equity analyst at Brewin Dolphin, says No
With trading volumes distorted by the summer holidays, the speculators have the upper hand because there is no support from bank proprietary trading desks.
Also, demand has been curtailed by refinery maintenance programmes and the ending of the “driving season” in North America. Excess supply is a problem, and a temporary move below $40 cannot be ruled out.
That said, it would not be sustainable, and we are encouraged by the underlying strength in demand resulting from the boost to spending power from lower energy prices.
While Opec supply will be inflated by the re-entry of Iran into the global market, we think that non-Opec supply will be lower, particularly since the marginal cost per additional barrel of oil is higher than the current price.
This, plus two years of cutbacks in capital spending by the major public quoted oil producers, will cause the market to reconsider its current confident outlook on the security of supplies.