Oil prices could come under serious pressure towards the end of the year if a recent bounce back in prices holds for the next few months, potentially falling as low as $32.00 per barrel. At least, that’s the opinion of Citigroup energyanalyst Seth Kleinman.
On Wednesday, West Texas Intermediate (WTI) dropped by more than 4.8% a barrel on the New York Mercantile Exchange. The commodity closed the trading session at $40.46, the lowest level since March 2009.
The drop came after an Energy Information Administration report showing U.S. crude stockpiles unexpectedly increased. Crude supplies rose by 2.62 million barrels last week, significantly higher than the 820,000 barrel stockpile decline analysts were expecting.
However, this might only be the beginning of the doldrums for the energy industry. Following the government release, Citigroup issued a decisively bearish oil price forecast for the rest of 2015. (Source: Financial Post, August 19, 2015.)
“Balances point to further oversupply throughout 2015 begging the question how low oil can go,” Citigroup analysts led by Seth Kleinman said in an e-mail report. The price of $32.40 a barrel for U.S. crude futures reached in 2008 “is a conceivable reality.”
Weak demand is also hurting oil prices. Economic growth in China, the world’s second-largest oil consumer, is slowing. Other emerging economies, including Brazil, India, and Russia, are also weakening.
Worse still, the Federal Reserve is expected to raise interest rates later this year, putting upward pressure on the U.S. dollar. Because oil is priced in U.S. dollars, the commodity is becoming more expensive for countries with other currencies to buy oil, further softening demand.
All told, with a glut in the supply side, weakening demand, and the rising dollar, we should expect to see low oil prices in the foreseeable future.