Europe Economy

Oil Could Sink to $40 on Stronger Supply: Economist

The price of oil could be set to catch investors by surprise and slump to $40 a barrel in 2010 as crude supply outstrips demand, Chris Watling, CEO of Longview Economics, told CNBC late Monday.

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"There's a lot more supply around in the next year or two than people realise. Yes, Chinese demand is strong, but demand for oil over the last twelve months has underperformed every month," Watling said.

"I wouldn't be surprised if it touched $40-45 this year, just touched it. I don't think it will be there very long," he said.

- Watch the full interview with Chris Watling above.

The price of oil fell around 1 percent to $74.45 in midday trading in London Tuesday.

Both oil inventories and spare capacity are high and rising, according to Watling.

Iraq is producing about 2.5 million barrels of oil per day and by 2017 it looks to be producing 6.5 million barrels, he said.

"Spare capacity will be 4-6 million barrels for the next 2 or 3 years, which I think is enough to get the oil price down," Watling added. 

Investors aren't geared up for a sharp fall in the price of oil, according to Watling, meaning a move lower could prove costly for some.

"The market has never been longer in terms of its speculative position in oil," he said.

Watling thinks that global economic growth will surprise to the upside this year, with the easing oil price giving a boost to the recovery.