Brent falls towards $85 amid supply glut, lower price forecasts

By Osamu Tsukimori

TOKYO (Reuters) - Brent crude extended its decline to a third day, dropping towards $85 a barrel on Tuesday, still under pressure from a Goldman Sachs report that slashed oil price forecasts amid a global supply glut.

Citing rising production and insufficient demand, Goldman Sachs on Sunday cut its forecast for Brent to $85 a barrel from $100 for the first quarter of 2015 and reduced its projection for U.S. crude to $75 from $90.

Analysts from other major banks have also cut forecasts for 2014 and 2015 crude oil prices, citing global growth concerns, a strengthening dollar and ample supplies.

"It will take time to mop up this excess supply," said Tony Nunan, oil risk manager at Tokyo's Mitsubishi Corp.

"It will take either a major OPEC cut or it will take a slowdown in shale oil. And the wild card would be a major disruption in Libya or Iraq, which could happen still."

London Brent crude for December delivery was trading 22 cents lower at $85.61 a barrel by 0743 GMT, after dropping 30 cents by the close on Monday.

U.S. crude for December delivery was down 21 cents at $80.79 a barrel. The West Texas Intermediate futures hit $79.44 on Monday, the lowest level since June 2012.

The dollar's weakness amid expectations of more dovish comments from the U.S. Federal Reserve, due to kick-off its closely watched two-day policy review later in the session, provided some support to oil prices.

There was more consensus among the analysts that project lower oil prices to continue through next year.

"Unless the sudden cold air mass invaded New York or something, it would take until next spring to clear the oil stockpiles that have already built up," said Kaname Gokon, general manager of research at Okato Shoji in Tokyo.

"The market sentiment is not going to change till then."

OPEC MEET

Also hurting investor sentiment was news that China's industrial profit growth slowed in the first nine months, reinforcing signs of fragility in the world's second-largest economy.

The meeting of the Organization of the Petroleum Exporting Countries (OPEC) next month in Vienna is shaping up to be one of the most important in years, with Brent having lost more than $30 from a mid-June peak on the supply-demand imbalance.

Some OPEC members, such as Saudi Arabia, Iran and Kuwait, have indicated the group is unlikely to cut output to bolster oil prices that hit a near four-year low this month. Other members have said they would support cuts, but little momentum has built around the idea of cutting production targets for the first time since the 2008 financial crisis.

Saudi Arabia has been quietly signalling that it is comfortable with prices below $90 and has been slashing its crude prices to Asian customers to compete for market share, sparking talks of an oil price war.

Still, the kingdom, the world's top oil exporter, supplied less crude to the market in September than a month earlier, an industry source said last week, even though its output rose.

"Even if they don't come to some agreement on a cut, Saudi will probably cut on their own," Nunan said. "It may not be an official announcement but they will reduce their production in line with demand, if customers are not asking for crude."

Despite disruption in producers such as Libya and Iraq, global oil supply remains high.

In the United States, commercial crude stocks were forecast to have increased 3.5 million barrels last week, while stocks of distillate and gasoline likely fell, according to a preliminary Reuters survey ahead of weekly inventory reports out of the world's biggest oil consumer.

Industry group the American Petroleum Institute (API) will issued its report later in the day, and the U.S. Department of Energy's Energy Information Administration (EIA) will follow with its weekly data on Wednesday.

(Editing by Tom Hogue and Prateek Chatterjee)