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Who is benefitting from low oil prices?

There is no avoiding the fact that oil prices have plunged significantly in recent months, with a  distinct possibility that they will continue to plummet in late 2014.

Since mid-June, when crude stood at around $105 a barrel, prices have fallen to just $87, representing a 20 per cent drop, which has raised questions about just how far it can go.

Of course, there is a possibility that prices may rebound, but this raises the additional question of what level they will eventually stabilise at.

Reduction in output?

There is also the possibility that Saudi Arabia and Opec could make the decision to cut output when they meet next month, while the overarching question of whether US shale oil production will be affected - and to what extent - looms above.

On the one hand, a drop to $80 a barrel would see Opec countries lose out on some of the recent $1 trillion in earnings, while in the US capital expenditures to expand production would have to be cut, slowing down the shale revolution.

Conversely, a drop would be of significant benefit to the world economy, with analysts predicting that it would be equivalent to a major quantitative easing programme that would catalyse economic growth.

It is estimated that a decline in prices could generate around $660 billion a year - or $1.8 billion a day - which would work out at $600 per household in the US alone, and a similar amount for major consumers across the globe, aside from Opec countries, who already benefit from low prices.

Multiple factors

The are several reason for the decline in prices, with market sentiment a major factor, as well as industry fundamentals, though the geopolitical landscape is arguably the single biggest contributing factor.

Since the Libyan disruption resulted in one million barrels a day being taken off markets, Brent crude has averaged around $110 per barrel, in spite of an increase in Saudi production in 2011 - mainly because the light, sweet crude being produced could not be replaced with heavier, higher sulphur-content crude by refiners.

As such, two separate trends have emerged over the past three years - one of domestic governance problems across oil exporters, and another that has seen tremendous growth in US oil output as production becomes less costly and break-even costs fall to well below $75 per barrel.

Continuing trend

This is set against the backdrop of a weak global economy and sluggish oil demand, which is rising at a rate of less than one million barrels a day, meaning any increase in economic activity and demand for 2015 will still leave an overall surplus that weighs heavily on prices.

Unless Opec cuts production, it is likely that prices could fall to $80 a barrel, though - as ever - several other factors will be at play, with a surge in Libyan production or an Iranian nuclear deal each resulting in more oil coming onto the market.

Much rests on November's Opec meeting, but if the downward trend continues, the global economy looks set to benefit to the tune of billions.

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