Here are the reasons oil is plunging toward $60

 
NEW YORK (MarketWatch) — Oil’s stunning price collapse is undoubtedly one of 2014’s top stories and will remain a major theme for investors in 2015.
Indeed, oil futures CLF5, -4.12%  have plunged 38% from the beginning of the year, including carnage in Wednesday trading that saw oil trade in the $60 neighborhood, while Brent LCOF5, -3.55%   is down 42% for the year.
Here’s a look at the factors that have led to the largest price decline since the 2008 financial crisis.

Shale oil

It's impossible to talk about oil’s plunge without talking about the supply glut. And it’s impossible to talk about the supply glut without talking about U.S. shale. Persistently high oil prices helped to spur the fracking revolution, which in turn triggered a boom for North Dakota and other shale-oil-rich regions.
Falling prices will weigh on production of oil from shale and other resources as energy firms cut back on projects, but investors are debating exactly how sensitive shale production will prove to be.
“In fact, we can even imagine initially higher output, as many shale players will scramble for survival and cash flow becomes crucial,” wrote analysts at JBC Energy. “This will push them to reduce the backlog of already drilled and fracked wells, while focusing new wells on their most promising assets.”
On Wednesday, the U.S. Energy Information Administration reported a surprise increase in U.S. supplies of 1.5 million barrels in the week ending Dec. 5., which may reflect the push for producers to squeeze as much oil from their existing sites now as possible.

Price war

It’s not just the U.S., other major producers are also pumping away. OPEC, meanwhile, is keeping the spigots open in what many strategists see as nothing less than a price war aimed at routing shale and other higher-cost producers. The cartel opted at a closely watched November meeting to make no changes to its production levels, prompting another jarring decline for oil futures.
“This makes any rapid recovery of oil prices unlikely, especially as additional supply looks set to reach the market from northern Iraq and Libya,” wrote Carsten Fritsch, commodity strategist at Commerzbank in Frankfurt.

Weak demand

Then there’s the other side of the supply-demand equation. Slowing Chinese economic growth and a sputtering European economy have helped to keep demand growth under wraps.
The International Energy Agency estimates that 2014 oil demand of 92.4 million barrels a day, reflecting annual growth of just 680,000 barrels —the weakest in five years. The IEA expects a pickup in economic activity to boost demand by 1.1 million barrels a day in 2015. That said, demand should receive a boost from the declines in oil prices that have already taken place, said Julian Jessop, economist at Capital Economics.
OPEC, in its monthly report on Wednesday, forecast that demand for its oil would drop to 28.9 million barrels a day in 2015 versus 29.4 million barrels a day this year.

Dissipating geopolitical fears

Oil had rallied into midyear, buoyed in part by geopolitical tensions surrounding Russia’s annexation of the Crimea, civil war in Syria, and broad advances by Sunni insurgents across northern Iraq. But the risk premium soon dissipated as investors came round to the view that none of the scenarios posed an imminent danger to supply. In Iraq, for example, southern oil fields remained well insulated from the turmoil.
Still, the prospect for disruptions can’t be ignored and it’s possible that a geopolitical shock could spur a rebound at some point.

Strong dollar

Commodity prices are inversely correlated to the dollar. The oft-cited rationale is that a stronger currency makes dollar-priced commodities more expensive to buyers using other currencies.
The ICE dollar index DXY, -0.48%  , a measure of the currency against a basket of six major rivals, is up more than 10% since the beginning of the year (the dollar was moving slightly lower Wednesday). Moreover, the index is up more than 11% since May.
Binky Chadha, chief global strategist at Deutsche Bank, argues that the strong dollar is the primary factor in oil’s decline. After all, oil supplies have been building for a long time. It’s hard to believe that investors just “suddenly woke up” to the oil glut at midyear, he said.
Oil’s plunge started not long after the dollar rally began to accelerate, Chada notes, observing that it usually takes a rallying dollar a year and a half to cover the ground it’s gained in the last five months, Chadha told reporters on Thursday, which might make finding a bottom in oil “a function of where the dollar stalls.”