How Low Can Oil Prices Go?

The past few months have been pretty dire for the oil industry, and with prices hitting bear market territory in late July, many spectators have been left asking the question, how low can oil prices go? The working week of July 20 – 24 saw the industry suffer a loss of over 5% driven by an oversupply of crude, a rise in domestic oil-drilling rigs and concerns over the future of Chinese demand. Since the $61 per barrel highs seen in June, oil futures have dropped by 22% and don’t look set to rise again any time soon.

So why has the oil market entered bear territory? According to Matt Parry, senior oil analyst at the International Energy Agency in Paris the devastating drop was triggered by “The generally growing realization that the already oversupplied oil market would face even looser conditions, largely triggered by sharp gains in Saudi Arabian supplies each month.”

Crude takes a hit

Crude has been suffering some serious blows, with September West Texas Intermediate CLU5 -0.08% falling by 31 cents to just $48.14 a barrel on the New York Mercantile Exchange. After Baker Hughes Inc. revealed a rise in the number of active U.S. rigs WTI oil dipped below the $48 mark. The announcement confirmed that active drilling rigs rose from 638 to 659 while natural-gas rigs were up by 19 to a total of 876. Global-oil benchmark Brent LCOU5, +0.17% also fell by a huge 1.2% on London’s ICE Futures exchange.

Naeem Aslam, chief market analyst at AvaTrade is understandably concerned about the surplus, saying “Crude oil is struggling for any upside gain and experienced another depraved week as the inventory data released this week reminded us once again about the extra oil glut on the market.”

China sparks concerns

The latest Chinese manufacturing data also played its part in driving down prices. As the second-largest oil consumer on the planet a lapse in production would mean an even bigger blow for the industry.

So how low can oil prices really go? Unfortunately for drilling operators, investors, spectators and shareholders, there’s no real way of knowing. However given the current market conditions the price is definitely not set to skyrocket anytime soon.

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