Why oil prices have fallen

In June, the price of Brent crude oil hit $115 a barrel, an eight-month high. But the spike didn’t last long. This week, oil was down at an eight-month low, below $104.

The Islamic State insurgency in Iraq had fuelled fears of major supply disruptions, but the jihadists’ stronghold is largely confined to the north of Iraq, and Iraqi exports come mostly from the south.

Meanwhile, the start of air strikes last week should weaken the Islamic State’s position, further reducing the odds of supply disruptions.

Elsewhere, reckons Barclays, any disruptions to Russian supplies due to sanctions are likely to be eclipsed by sliding demand in Russia as the economy weakens.

So, while geopolitical jitters will keep markets on their toes, so far a major disruption to oil supplies seems unlikely.

And as far as the fundamentals are concerned, the market looks well supplied with oil. Libyan production has rebounded in recent weeks and US stockpiles recently hit a record. Demand growth is subdued, with Europe’s economies struggling and Chinese growth ebbing in recent years.

The upshot, according to Barclays, is that prices will stay in the trading range of recent years, averaging $108 a barrel in 2015 and $109 this year.

Merryn

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