Supply glut sends oil price tumbling below $80

“The market continues to search for an oil price floor,” says Barclays. Brent crude futures have plummeted by over 30% since June and have fallen to a new four-year low, below $80 a barrel.

Analysts, most of whom earlier this year reckoned oil would stay around $100 throughout 2014, have been scurrying to revise down their price forecasts. Some now reckon black gold will fall below $70.

The fundamentals certainly suggest it could. Demand growth has been tepid and a supply glut has emerged.

US shale production is expanding strongly – in October it was rising at 30% year-on-year – and Libyan output has rebounded in the past few months. Nor has the fighting in Iraq disrupted exports there.

Opec, the oil-producers’ cartel that accounts for around a third of global production, is not expected to cut output soon.

For now, key producer Saudi Arabia appears to want to put the shale industry in the US under pressure by keeping prices low and thus discouraging output. That would allow the Saudis to gain market share.

Meanwhile, as Capital Economics points out, even if Opec does cut production, it “would not change the bigger picture of ample global supply against a backdrop of weak demand”. Supplies could rise even further if sanctions against Iran are eased.

Longer term, part of the fall is likely to be self-correcting, as lower oil prices ease pressure on consumers, bolstering overall demand.

JP Morgan calculates that a 10% fall in oil prices eventually adds 0.25% to US GDP. For now, however, $70 oil looks ever more likely.

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