Has the fall in Oil ended?

Since June 2014, crude oil dropped nearly 60%. Only 5 times in the past have prices dropped more than 30%. Oil prices haven’t been helped by the new supply demand dynamics, shale oil production (which has added 4m barrels/day), strong US dollar and other technological developments. The sentiment has been bearish – in fact an analysis of open interest, shows traders and funds holding overall short positions in oil.

However, recently oil prices have edged up higher by nearly $10 in the first two weeks of February with the general consensus being that prices are bottoming out. So the question is – does the bounce in oil prices in the past month herald the end of the crash?

There remains the issue with Islamic State, and more recently their attack on an oil pipeline in Libya. The Egyptian Air Force subsequently launched an air strike against the militants in Libya causing rising tensions which will provide support for oil prices. Combined with this, the recent rig count on Friday was the lowest in 3 years– pushing Brent to above $60 a barrel for first time since December. We’ve also seen recent weakness in the US dollar which has further contributed to the increase in prices. The US Dollar Index which measures the performance of the US Dollar against a basket of currencies has halted its appreciation – which first began in May last year.

Technical analysts may point to further upside for oil, as a review of Brent daily chart shows it has moved into a bullish channel - although intraday volatility remains. This recent bounce in prices may be due to speculators closing short positions and taking profits. However, the medium term outlook could well depend on oil supply and also shale output. OPEC cutting supply and looking past market share reasons may well contribute to a rise in prices, but there seems little sign of it happening at the moment. And although shale drilling activity has fallen by 10-20% since late last year and the permits granted for new drilling in Texas and North Dakota have halved, the productivity of each rig is increasing significantly due to newer drilling techniques. This leads to a higher output putting downward pressure on prices, and less chance of a significantly higher price of oil.

Meanwhile, the International Energy Agency reduced its 2015 global demand forecast for the fourth time in 12 months by 230,000 barrels a day to 93.3 million and sees supply exceeding demand this year by 400,000 barrels day. Throw in the slowing global growth in China, Japan and Eurozone and oil price appears to have little reason to rally – with some commentators suggesting prices as low as $20 a barrel.

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Reuters: Business News