The oil price is likely to fall even further

The price of oil has fallen victim to market uncertainty following the Greek referendum. The Brent international crude prices have fallen below $60 a barrel, with a drop of more than 6% recorded on Monday, the biggest intraday fall since February 4 according to the Financial Times.

The paper says oil is headed for a bear market, and some analysts watching the commodity agree that the price of oil has further to fall.

Analysts at Capital Economics believe that the partial recovery that oil prices have seen in the past few months was due to “at least a stabilisation” in US production.

But now a nuclear deal with Iran is likely to put increased downward pressure on oil prices, so Capital Economics revised its price projection for oil downwards to $55 a barrel for Brent for the end of the year, from $60 previously.

The analysts lowered their target for West Texas Intermediate (WTI) crude to $50 a barrel from the previous forecast of $55.

Besides the Iranian deal, other factors have led to the downward revision for the oil price:

  • The Greek referendum, which is likely to affect financial markets and consequently the economy, possibly cutting demand for oil;
  • Slowing demand from China, as the mainland Chinese stock market’s rally seems to be approaching the end, putting even more downward pressure on the economy;
  • Rising evidence of a pick-up in US oil production, with the rig count turning.
Oil Prices and US Rig Count

Oil prices to fall as the US rig count rises. Source: Capital Economics

The total number of US drilling rigs that were active increased last week for the first time since last December.

“Admittedly, the rise in the total number of rigs was small, only three new rigs were added, but looking at just those rigs which are focusing on drilling for oil shows a more significant rise of 12, or about2%,” Thomas Pugh, commodities economist at Capital Economics, wrote in a market note.