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Oil Enters Bear Market – Analysts Expect More Downside

Crude oil is now in ‘bear market’ territory, having fallen more than 20 percent since February 24, and analysts warn that there could be more room for the commodity to fall.

U.S. July crude fell to $87.95 at 2:30 p.m. Singapore time (6.30 a.m. GMT), 20.6 percent lower than the year’s high of $110.85 hit on February 24. Front-month crude prices are headed for a loss of about 17 percent for May, the biggest monthly drop since December 2008.

Analysts say there could more declines for oil amid uncertainty over the global economy and on selling by speculators who had hoped that prices would go higher because of a supply disruption in the Middle East.

Andrew Su, CEO of Compass Global Markets, who has been ‘short’ oil since it was at $102.50 per barrel, said he expected it to fall to $78 at the end of September.

“We will remain short in the meantime. There are various reasons for that, and I think one of the biggest reasons for the accelerated fall is that a lot of these war mongers, speculators who have been buying oil at above $100 are now bailing on those longs,” he said.

Concerns over the global economy, especially the European debt crisis, will also weigh on prices, according to a CNBC surveywith many expecting oil to slip towards mid-$80s per barrel this week.

On Wednesday, Barclays’ technical analysts said if prices remained weak into the end of the week, U.S. crude could soon fall to $80 a barrel.

“We are resuming our bearish view for crude oil,” Barclays’ technical analysts led by Jordan Kotick wrote in a report. “For West Texas Intermediate (WTI) the move below $89.15 signals downside extension toward our targets near $80.50".”

Daryl Guppy, technical analyst and trader, saidwhile oil has strong historical support at around $87 per barrel, there is a high chance that it will sink to $78 if it breaches that support. “Watch for consolidation round $87,” he said. “Then support around $78.”

But Mike Harrowell, Senior Resources Analyst at BBY in Sydney, said that while concerns over Europe may loom over the oil market, prices could be supported at current levels because global demand is still looking “solid”.

“Demand is currently O.K. and growing,” Harrowell said. “We are all waiting for the end of the world in Europe, and maybe there will be a downdraft, but at present, global product demand is looking at solid, if slow growth. The International Energy Agency reckons that second-half demand will be one million barrels per day higher than in the first half.”

By CNBC's Jean Chua

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