The oil bear is back

The oil price is back on the slide after almost doubling in May.

Oil fell to 12-year lows under $30 a barrel in January 2016, before almost doubling by May. Now it is back on the slide. Both US futures and Brent have lost 20% from this spring's high, fulfilling the definition of a bear market. Brent is now back at around $40. It is dawning on more and more investors that "this market is far from balanced and not clearing", John Kilduff of Again Capital told "We're deep in the woods here."

One problem is that refineries appear to have overestimated petrol demand in the US; even as the driving season got going in mid-July, petrol stockpiles climbed. The oversupply of petrol implies lower demand for crude from refiners. Meanwhile, oil prices have received a boost from several one-off problems hitting supply in recent months, including Canadian wildfires, an oil workers' strike in Kuwait and insurgents' attacks on pipelines in Nigeria. "Many of these outages have stabilised or gone away," says The Wall Street Journal.

Perhaps most importantly, however, the recent decline in US output looks set to bottom out and reverse. After a year of cutbacks, the number of active drilling rigs has risen in eight of the past nine weeks. The US Energy Information Administration now expects US production to trough in September. US mid-tier shale producers have kept cutting costsand finding efficiencies. The upshot is that they can "just about cope with oil prices in the $40-$50 range", says Ambrose Evans-Pritchard inThe Daily Telegraph.

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That means that they can "produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits", adds Evans-Pritchard. Several Opec states need oil to trade at $100 a barrel to balance the budget. So much for Saudi's calculation that it could "break the back" of the US shale industry. With supply increases apparently capping prices at these levels for now, Opec is set for a bumpy few years.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.