The rapid downward spiral of crude oil prices in the last three months or so has flummoxed even the most seasoned market participants. Now that a new reality has hit the market – oversupply, demand slowdown and inventory overhang – almost everyone is engaged in scenario building.

A price of upwards of $100 a barrel since 2011 triggered a huge supply response, especially outside of the US, so much so, storage constraints became a huge inventory management issue.

Admittedly, the market witnessed the combined effect of slowing global economic growth, currency deflation and subsidy reduction in a few major emerging markets – not to speak of growth concerns emanating from China. These gradual developments got dovetailed in the last quarter of 2014. The slowdown or contraction, highlighted by leading indicators, accelerated the price collapse.

The current year holds a number of possibilities and some of them point to a rebalancing of the market in the months ahead. Although not being discussed with any seriousness at the moment, the OPEC could surprise the world with production cuts. At the same time, the non-OPEC supply response to low prices could be larger and faster than currently assumed. Demand, on the other hand, has the potential to surprise to the upside because of price elasticity.

So, where would all these lead the world crude market? Will prices crash below $30 a barrel or would the market improve quickly and begin to test $100 again? Neither of this looks highly likely on current reckoning.

It has to be borne in mind that capex spending in production is decelerating. Again, the US shale response to global oversupply is likely to occur no sooner than in the second half of this year as producers would need more solid and continuing evidence of sustained low prices. There is reason to believe, a combination of economic strength under the lead of the US and price elasticity will drive demand growth. Of course, it is hard to gauge or quantify the global elasticity impact at this point in time.

In a general sense, in 2015, demand growth may improve better than in 2014, but even this scenario carries a bit of downside risk given large inventories piled up. As for crude prices, the world needs to get used to a ‘new normal’. What the new normal will be is hard to call right way, but it is clear that the new normal wont’ be $30 nor would it be $100 a barrel.

On current reckoning, the outlook for the world crude market is clear. In the short-term, the market looks bearish to neutral and in the medium term, neutral to slightly bullish as the physical market is widely seen to begin to rebalance in second half of this year.

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