U.S. oil prices seem to be in free fall with no parachute in sight, having lost more than 5% during the past week. The negatives are in the ascendancy with a continuing oversupply of crude, an increase in the number of drilling rigs in the U.S. and a falloff in demand from China, a major oil consumer.
Oil hit a high of $61 per barrel in June and has gone rapidly downhill since then to show a loss of 22% during the last month which is starting to look very much like bear market conditions.
John Macaluso, an analyst at Tyche Capital Advisors, said that the main reason can be attributed to high production levels worldwide. He went on to state that inventories are continuing to increase at this time of year.
Speaking about prices on the NYMEX, Macaluso said that with crude oil closing under $50 a barrel, “this should be a new resistance level as prices continue to sell off.”
The expected increase in global oil demand has not been met as the global economic recovery has been sluggish at best, nor is the data coming out of China very encouraging in terms of an increase in the demand for oil.
Several factors have merged together to trigger the bear market and these include high Saudi Arabian production levels, a strong U.S. dollar (USD), unimpressive demand levels and uncertainty regarding the timing and the effect of the re-entry of Iran as major oil producer and supplier.
Matt Perry, senior oil analyst at the International Energy Agency in Paris, said in an email that, “by the generally growing realization that the generally oversupplied oil market would face even looser conditions, largely triggered by sharp gains in Saudi Arabian supplies each month”, was the primary cause of the bear market.
The rapid fall in prices can be seen in the fact that West Texas Intermediate crude (CKU5, -0.99%) for delivery in September fell 31 cents to settle at $48.14 on the NYMEX. Based on the most active contracts, prices shed 5.4% for the week meaning the price had dropped for 4 straight weeks. The actual September crude contract fell by 6% from its close a week earlier.
Meanwhile, Baker Hughes Inc. (BHI, -1.01%) released data on Friday indicating that there had been a sizeable weekly increase in the number of rigs actively drilling for oil in the U.S. to 659, which caused West Texas Intermediate to briefly drop below the $48 level.
Also, the Caixin China Manufacturing Managers Index’s initial reading stood at 48.2 in July.
A reading over 50 indicates industrial expansion, while anything below 50 indicates negative growth. The data was very disappointing, coming in well below market expectations.
Finally, Naeem Aslam, chief market analyst at Ava Trade, said that crude oil is currently struggling for any upside gain. He went on to say that the inventory data that was released last week was a clear reminder regarding the global supply glut. Speaking about China, Aslam said the data, “painted another fragile picture for the oil demand.”
MT4 Chart: Oil