Downward pressure on crude oil sent prices to their lowest level since April 6, sounding the alarm for commodities traders and countries whose economies are dependent on energy revenues. But some analysts predict that the worst has yet to come.
On Friday, Brent crude broke past the $42 a barrel resistance level tracing into bear market territory while its US counterpart West Texas Intermediate was down 1.1% to $40.60 a barrel, Sputnik reported.
Oil prices have collapsed a concerning 16% for the month of July on a whole marking the worst monthly decline for the year so far. Prior to this month, energy prices had been on a general upward trend after falling to a 13-year low of $27 a barrel in February.
The story behind the violent crash in oil prices has been the same throughout the month with US energy reserves holding strong despite a slowdown in production in the face of flagging economic demand that saw the American economy grow only 1% in the last quarter and with manufacturing data signaling a recession may be on the way.
In addition to flagging demand, supply continues to overwhelm the market as Saudi Arabia continues to persist on its policy to keep the market oversaturated. When oil prices careened off a cliff in February, the Saudi kingdom vowed to increase crude output by 1 million barrels per day immediately with a similar jump in production planned for July.
Energy demand continues to look bleak in the near and mid-term future with China’s latest GDP figures sparking concern despite jumping above a 6% annual growth rate for the first time in years.
A downward spiral in oil prices could end in a sharp bounce back for energy markets with analysts fearing that oil-rich states like Libya and Venezuela, whose budgets are based heavily on commodities prices and which lack sufficient access to credit markets, could descend into political chaos due to continued economic pressures caused by the collapse in oil prices.
This would cause production to falter, suddenly pulling millions of barrels of oil per day off the market in what could push prices upwards.