Tuesday 02 August 2016 4:08 pm

US oil holds above $40 after falling into bear market territory

Crude prices crept into positive territory today, after US oil dropped below $40 per barrel for the first time since April yesterday.

Brent crude, the global benchmark, rose 0.69 per cent to $42.43 per barrel in late afternoon trading. Its US counterpart, West Texas Intermediate, swelled 0.17 per cent to $40.23.

Increases in the number of US oil rigs and Libya's suggestion that it will return to the market, as well as an anticipated higher output from the Organisation of the Petroleum Exporting Countries has fuelled pessimism recently.

Weaker demand from refineries, which process oil to create products such as petrol, are also expected to weigh on prices.

Big investors have noted the negative sentiment, and dramatically increased their financial bets that oil prices will fall further.

"Speculators increased their shorts by the biggest volume on record… for WTI crude…, dragging the net long position in WTI to its lowest since February," said Matt Smith of US-based ClipperData.

He continued: "Another bearish development from the CFTC data has been gasoline positioning. Speculative positions in gasoline have moved to a record net short position as hedge funds bet on an ongoing gasoline supply glut."

But analysts at investment bank UBS said while oil markets look very similar to this time last year, with prices peaking in May/June and then falling in July, the underlying fundamentals are very more favourable.

It said that despite recent declines, the number of US oil rigs remains well below the level which would stop US output falling.

"Elsewhere, there remains a significant amount of capacity shut-in within Opec and while there have been suggestions that a Libya re-start is imminent the view of the National Oil Corporation (and ours) is that damage to fields and infrastructure means there will not be an immediate surge in exports."