The crude market has been on a free fall in recent weeks, having lost a good 30 per cent from the early October peak, clearly a case of too much too soon. With Brent falling below the psychological $60/barrel late last week (Friday saw a 6 per cent fall to $58.4 intraday) and the highly-pressured WTI a good $10 a barrel less than Brent, view is gaining ground that crude oil prices may have overshot to the downside.

While the market was ready for a correction from the unsustainable levels of $86/barrel in early October (‘Crude may have peaked’, BusinessLine, October 9), the extent of price collapse has taken market participants by surprise. Brent has lost a whopping $25 from its recent peak.

Without doubt, given the emerging market fundamentals of demand, supply and inventory, one could foresee even six weeks ago that a price decline was inevitable. What possibly exacerbated the price action was the large-scale exodus of speculative long position holders who saw no opportunity for a higher price bet. That’s what speculation does to commodity markets — exaggerate the price action.

A host of factors — including supply and demand side as well as geopolitics — has apparently triggered the collapse, starting with the softening stand of the US as far as Iran’s oil export is concerned. Large importers, including India, have been granted waivers. Importantly, production in OPEC, Russia and the US has been rising recently, while the US stocks too have been on the upswing.

Concerns over slower consumption growth in the wake of heightened trade tensions between the world’s two largest economies — the US and China — have played their part while some experts believe the global economic growth too is at the risk of a slowdown.

Now that the market has overshot to the downside and producers are the losers, talks of production cut are sure to revive. The next meeting of oil producers is scheduled for December 6 where one can expect some market signals to emerge. Indeed, at the current price levels, even the earlier optimism about expanding US output in 2019 is waning.

Where would the market go from here? Many believe that, in the short run, there could be a little more pain in terms of a further fall in price. But, going forward, prices have to move above $60 a barrel. This is especially because in the bourses, speculative net long positions have reached a three-year low and further exit of such positions is rather limited.

In the early December meeting, it should become fairly clear whether or not there will be output cut. It is seen increasingly inevitable that Saudi Arabia and Russia may decide to reduce production. Also, we cannot lose sight of the fact that waivers on Iranian oil are temporary.

Fall in the international price of crude oil has surely brought relief, if not cheer, to large import-dependent economies like India. It has also helped the rupee firm up a bit, making imports so much less-expensive. However, there is absolutely no guarantee that crude prices are going to stay at the current relatively low levels. If anything, prices will bounce back sooner rather than later and in the first quarter of 2019, it could average close to $65 a barrel.

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