LONDON (REUTERS) - World oil markets quietly breached an important barrier as they crashed nearly 30 per cent to below US$30 a barrel in the opening weeks of 2016, crossing the fuzzy line separating a rational response to fundamentals from an irrational fear where the only way forward is down, down, down.
Animal spirits have taken over the futures markets of New York and London, with momentum-driven algorithmic traders and big hedge funds driving oil prices far beyond the point that even once-bearish analysts say is justified - at least in the medium-term - by supply and demand.
That marks a change from most of the past 18 months, when oil's long descent from US$100 a barrel was broadly viewed as an often painful, sometimes lumpy adjustment to a fundamentally "new normal" in which Opec would no longer restrain its supply, leaving US shale drillers to balance the market.
The process has taken far longer than expected as shale firms proved remarkably agile, slashing costs and drilling in sweet spots to keep the oil flowing. As they did so, prices lurched lower, first in the summer and again this month.
But now things have gone too far, many say. Data due on Friday are likely to show that big funds and speculators in the US oil market added to short positions that had doubled to a record 200 million barrels over the past three months.
"The price itself is irrational if you ask me," Khalid al-Falih, the new chairman of the Saudi state oil company Aramco and one of the Kingdom's most influential energy figures, said at the World Economic Forum annual meeting in Davos. "Prices are supposed to be set by the marginal barrel. The marginal barrel is certainly way higher than US$30 a barrel."
Few traders expect a quick recovery from this year's slump amid pressure from the deep supply glut and signs of economic weakness in China - the world's No 2 oil consumer.
Still, the evidence of oil's unsustainable future at below US$30 is mounting. US shale drillers are teetering on the brink of bankruptcy; Canadian oil sands producers are losing money with every barrel as their crude trades at US$15; heavy oil from Venezuela and Colombia is also underwater. Some US$380 billion in oil and gas projects have been postponed or canceled since 2014, according to consultants Wood Mackenzie.
"It's not just the price, it's the incessant selling, every day. That surprised me," says Amrita Sen Chief Oil Analyst at Energy Aspects. "We are really in the realm of irrationality."
Not that the market has lacked excuses to sell: the rising US dollar; China's stock market meltdown; a vague worry that the diplomatic breakdown between Saudi Arabia and Iran had eliminated the already wafer-thin chance of an Opec deal.
Some of them have been fundamental in nature - such as the warmest December weather on record and easing of sanctions on Iran - though neither should have been news to traders.
More likely is that much of the selloff is driven by commodity funds who use algorithms to detect profitable trends - and often accelerate those trends at the extreme. Many programmatic traders fared far better than human fund managers last year, industry sources have said.
After a series of false plateaus since oil began falling from US$100 a barrel in mid-2014, potential bulls have been so badly burned that they have stopped trying to pick a bottom.
Until recently most Opec officials had generally addressed the rout as a painful but necessary measure to shut down high-cost competitors who were taking market share.
The fact that analysts and executives are now publicly calling out the market's 'irrationality' - many of them doing so for the first time since the surprisingly deep and prolonged downturn began 18 months ago - may yet influence prices.
If oil prices are now viewed as detached from fundamentals, they must surely rebound to higher ground, the thinking goes. By that logic, distressed oil producers may choose to hold out just a little longer rather than throw in the towel - postponing the point of maximum pain that bearish traders are waiting for.
In early January, top executives from major shale drillers told a private Goldman Sachs conference in Florida that they were planning on the basis of US$50 oil this year, an optimistic view that contributed to the price slide.
To be sure, overreaction in oil markets tends to be the norm rather than the exception, and the view that oil is now far oversold does not mean that a recovery is imminent.
One of the more bullish banks, Standard Chartered, said last week that relentless selling could push oil as low as US$10 a barrel. John Maynard Keynes' warning that a market "can stay irrational longer than you can stay solvent" is well heeded.
There is no indication that Saudi Arabia, the driving force behind of Opec's decision to quit supporting the oil price, is ready to consider abandoning its shock therapy.
And not everyone agrees that markets have overshot. Consultants Rapidan Group told clients this week they cut their Brent crude 2016 forecast from US$38 to US$30 a barrel, among the lowest of major banks, citing weaker economic growth and a quicker recovery in Iran's exports.
"This is what an authentic boom-bust is like - perfectly rational," said its president Bob McNally.
Irrationality can also cut both ways. On Thursday, prices surged more than 6 per cent to back above US$30 a barrel - despite the fact that US crude and gasoline stockpiles reached a record high. Brokers said short-covering was to blame.
The best advice for now, according to some, is to stay out of the way and wait for some of the smoke to clear, says Citigroup's global head of commodities research Ed Morse, who had warned last August that US crude could drop to the then-unthinkable level of US$30 a barrel early this year.s "What one does, rationally, is abstain," he said.