Oil Prices South-Bound

First week of the New Year marked the sharpest fall in two years for crude oil prices – a weekly loss of about 8%. The fall comes amidst continued mild weather in the north-east coast of the US and ample supplies of petroleum products. On Friday, the prices recovered slightly, helped by a better-than-expected US jobs report for December. US light crude oil settled 72 cents up at $56.31 a barrel in New York and London's Brent crude rising 53 cents to $55.64. The overall sentiment, however, looks to be bearish.

The crude prices have been falling despite two production cuts agreed on by OPEC members - 1.2 million barrels a day in November and 0.5 million barrels per day beginning February next. The continued price fall reflects the market belief that members of the oil cartel are not adhering to the agreed production cuts.

While weather has been a key driver of sentiments in recent weeks, the drop in oil prices is accompanied by a simultaneous drop in other commodities as well. With global outlook for commodities being not-so-bullish, significant shifts in asset allocation of investors is expected in the year ahead. This may mark a halt in the bull run in commodities. The informal 'floor' price for crude oil that OPEC wants to defend - understood to be $60 a barrel - has been convincingly breached and next few weeks may even take the price below $50, as little support is seen forthcoming at current levels.