The price floor is a long way down

The oil price, as measured using the Brent benchmark, continued to slide early this week, hitting a new six-year low of $45 a barrel. It has now plunged by 18% this year and 60% in just six months. Analysts virtually all of whom failed to predict the trend have been racing to cut their price forecasts as a result.

Investment bank Goldman Sachs cut its forecast for the average price in the second quarter of 2015 from $80 a barrel to $42. The latest slump was partly due to a statement from oil cartel Opec.

It insisted that it would not cut production. It is hoping to force many US shale drillers a key source of new supply out of business in order to protect its market share. Traders have begun to place bets on oil falling as far as $20 a barrel.

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What the commentators said

To find a floor, said Bank of America Merrill Lynch, the market needs one of three things: Opec output cuts, non-Opec supply cuts, or higher global demand.

The latter can't be expected to materialise for some time price falls take around six months to filter through and influence the world's appetite for oil. Opec won't be cutting for the foreseeable future.That leaves non-Opec producers.

On this front, there has been a lot of talk of drilling becoming uneconomical at around $60 a barrel. But exploration and drilling cost aren't the key issue for output, said Edward Hadas on breakingviews.com. The drilling is the pricey bit, but however much that costs, a well owner will keep producing oil from a well until it costs less to close down than to run.

This "operating break-even price is typically very low and frantic cost cuts will reduce it further". The upshot is that only a small part of overall production will become uneconomical until the price is below $30.

So while drilling is beginning to slow the number of US rigs fell by 5% in the month to early January production won't follow before prices have fallen further. Indeed, this week the US Energy Information Administration forecast an increase in American production next year. The oil-price floor, concluded Hadas, "could be a long way down".