Oil and Gas

Oil price: Why further falls may be on the way

Daniel Acker | Bloomberg | Getty Images

Those hoping for a bit of oil price stability after the past few months' volatility may be disappointed.

Next week's Organisation of Petroleum Exporting Countries (OPEC) meeting is widely expected to be another case of the cartel sitting on its hands, and maintaining levels of oil production despite historically low oil prices.

This shouldn't be any surprise to markets – yet there are other warning signs ahead. After the last meeting in January, crude prices (WTI crude) fell to a six-year low of less than $45 a barrel, then recovered to around $65 a barrel, as the growth in U.S. supply – the main reason why OPEC has been so stubborn about cutting output -- slowed in response to lower prices.

A worker walks at the Nahr Bin Umar field, Iraq.
Oil falls below $45 as OPEC plays hardball

And it looks as though OPEC may be getting the result it wished for. The growth in supply from oil producers outside OPEC is forecast to slow from 2.1 million barrels a day b/d) in 2014, to 1.3 million b/d in 2015 and 0.1 million b/d in 2016, according to analysts at UBS.

There have also been huge cuts in capital expenditure at the oil giants, with reductions of between 15-30 percent commonplace as the industry gets to grips with lower prices.

However, the decline in rig count has slowed down recently, indicating that the recent price recovery has led to more optimism among producers, and the decline in production may be levelling off.

Energy opportunities: A time of great change

For Saudi Arabia's plans to undercut producers with higher costs, continued rises in the price will be unwelcome. At last week's level of $65 per barrel, U.S. shale starts looking economical to produce again.

There are other factors suggesting that another fall may be close.

Net long positions – or the most speculative positions - in oil have risen to all-time highs, as analysts at Credit Suisse point out. The last time that speculative positions peaked and started falling, back in June 2014, a 60 percent oil price plummet resulted (although oil prices were much higher then).

Gas flares from a burner tower on the Petroleos Mexicanos (Pemex) Pol-A Platform complex, located on the continental shelf in the Gulf of Mexico.
Bulls are backing oil price breakthrough

Much of the recent oil price gains can be attributed to the fall of the U.S. dollar, which Keith Parker, head of global asset allocation research for the Americas at Barclays, thinks has boosted the oil price by 6 percent. If the currency in which oil is bought and sold strengthens further, oil should fall again.

However, despite being drowned out by the market's pessimists, there are still some oil price bulls out there - notably analysts at Bernstein, who argue that the shale supply will continue to decline, driving prices up to $85 a barrel next year.

- By CNBC's Catherine Boyle