Supply glut sends oil price tumbling below $80

The price of oil has continued to fall, while Saudi Arabia resists cutting back on production.

"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.

Advertisement - Article continues below

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.



Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019

Most Popular

UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020