Oil prices are back in a bear market, says Matthew DiLallo on Motley Fool. The price of Brent crude oil had rallied 50% since the start of the year to a high of $75 a barrel in April. But price falls of as much as 5% last week took cumulative losses since May past the 20% level that marks a bear market. Brent crude is now at $60 a barrel.
“The oil market is as complicated as I’ve seen it in a very long time,” Douglas King of the Merchant Commodity Fund tells the Financial Times. Under normal conditions, numerous supply problems would have seen the price of “black gold” jump: oil exporters’ cartel Opec and allies have been cutting output and US sanctions on Iran and Venezuela are also squeezing the market.
But conditions are changing. The latest slump appears to be demand-side driven, say Martijn Rats and Amy Sergeant in a Morgan Stanley note. Early data from the likes of the US, Australia, China and India show that year-on-year growth in oil demand “ground to a halt” between March and April. Morgan Stanley now expects oil to reach at $65-$70 in the second half of this year, revised down from $75-$80 previously.
A weaker global economy means that Opec and allies such as Russia are likely to back an extension of existing output cuts at a meeting next month, says Stephen Innes of Vanguard Markets. They will be aware that in this demanding environment, a failure to stick with the output curbs could see crude fall to $40 per barrel.