Has the simmering crude oil market peaked, even if for the time being? This is the multi-million dollar question everyone is asking. Since the start of September, prices had spiked by over 10 per cent reaching a four-year high despite the fact that at the Algiers meeting last month OPEC had declared that the market was comfortably supplied.

Now, crude prices have come off the boil, having lost about $3 a barrel from the highs of last week and $10 from the rate a month ago. Brent has dropped to $83.5 a barrel while WTI is below $74.

While the persistent fear of a supply shortfall triggered by sanctions on Iran coming into effect by early November had provided the market the thrust upwards, the huge flow of speculative capital prompted by worries over supplies has created huge net-long futures positions for financial investors which has exerted an exaggerated price action.

Many market observers believe the world crude oil market is currently facing no significant shortage, but the fear of outages is what has lent a bullish tendency. Even in the case of Iran there is an expectation that its oil exports may fall less sharply than feared, while Libya’s oil production has stated to rise.

Softer stance

Importantly for the market, the US appears to be softening its tough stance against buyers of Iranian oil and the possibility of some exemptions or in some cases, extension of time limit is real. India is widely seen as a potential beneficiary of the softening US stand on Iran. It is likely other buyers of Iranian oil — the EU, Japan and South Korea — may also be allowed to continue to buy from Iran for some more time. In the event, concerns over supply tightening will ease considerably.

At the same time, US crude oil stocks are on the rise. They increased by 8 million barrels last week, more sharply than at any time in the last 18 months, according to an expert. Additionally, seasonal factors come into play. The season for refinery maintenance is round the corner.

Strangely, the market has ignored the fact that total OPEC output last month was at its highest level this year; and also the fact that Russia and Saudi Arabia had agreed informally to raise output in the coming months. Indeed, Saudi production in October could reach a record 10.7 million barrels per day and Russia, 11.3 mbpd.

It is likely that the market fundamentals will soon start to assert themselves. In the event, the current risk premium of about $12 will begin to dwindle, which, in turn, will prompt the exit of speculative capital.

On current reckoning, the forecasts of crude touching $90-100 a barrel soon appear outlandish. If anything, the market appears ripe for a correction.

Rates could first drop to $80 a barrel and towards the end of the year close in on $75 a barrel unless of course the crude bulls discover a red rag.

The writer is a policy commentator and commodities market specialist Views are personal

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