Is this the new normal for oil?

The international oil market is buzzing again with all sorts of predictions. As always, there are takers for both bears and bulls. The recent slump this week has extended to 4 percent in three days and questions have started to surface whether the rally was short lived and the oil market balance is still distant.

No one knows the answer for sure. But oil’s march from $45/bbl to $63/bbl in just under two months was as smooth as it gets. It was just yesterday, when the doomsayers had officially informed the world of oil entering the bear market for a long haul. The recent slump of sorts has come after the International Energy Agency’s (IEA) world energy outlook – that sees global demand for oil receding in the near term.
And that is enough of a cue for investors to send the commodity down once again. But the likes of JP Morgan and Deutsche Bank still opine that the ongoing slump must not be for long and should rather act as an overdue correction, after a strong rally of two months and 25 percent.

In all fairness, the dynamics have changed as well. First and foremost is the Opec’s relentless and to some extent surprising commitment to the cause of production cut. The members have shown compliance of near 100 percent. This has surely brought about some balance in the market that was long missing. The sliding inventories as a result have worked as a perfect catalyst to the jump in oil prices. And as luck would have it, Saudi Arabia’s political situation could not have worsened at a better time for those who are long on the commodity. All eyes are now on strength of China’s demand for oil in the months to come –as there are contrasting reports emerging, some suggesting the growth to remain intact, while others seeing a dip in demand is just around the corner.

Oil prices, after a long while, now seem to be driven more by demand side factors than supply. The US production has remained steady, and shale producers would definitely be eyeing to up the game as well. But if the demand remains as per earlier projections, oil may stick around the current band in the north of $60/bbl. Whether this is the new normal is anyone’s guess, but China’s growth numbers would clear the picture more than any other factor, barring a catastrophe to any of the major oil producers.