An exceptionally mild winter, new sources of oil supply and slower economic growth in top energy consumer the US have triggered a bigger oil price slide than even the most pessimistic analysts predicted.
The 10 per cent fall since the start of the year - the most dramatic loss since December 2004 according to Reuters data - is out of proportion to any fundamental weakness and has spread to the wider commodities asset class.
US crude was hovering above $55 a barrel today, a key technical level, which if convincingly broken could pave the way for a deeper decline.
Oil's weakness could strengthen the Organization of the Petroleum Exporting Countries' resolve to enforce supply cuts of 1.7 million barrels per day.
Analysts said the other key factor in checking the slide could be the entrance of new fund money as investment managers decide on their annual allocations.
"I think it would be premature to abandon the crude market completely," said Evan Smith, a fund manager at Texas-based US Global Investors. "There are still many supportive factors."
"Our view is the price will likely be rangebound between $55-$65 a barrel this year versus the $66 a barrel average in 2006," he said. For a poll on price predictions click on
But in the immediate term, there was also a risk of further hedge fund selling following an increase in levels of open interest, or positions that have not yet been liquidated.
"There is still the potential for a further correction. It's never a good sign when there is a big drop like this with rising levels of open interest," said Olivier Jakob, analyst at Petromatrix in Switzerland.
He said a close below $55 could pave the way for a move down to $50 a barrel.
That would be far below the $60 a barrel level for US crude OPEC is widely believed to be seeking to defend and also below the $55-$65 a level leading OPEC producer Saudi Arabia is thought to want.
The less bearish analysts predict OPEC will succeed in supporting the market.
Following a 25 percent slide from a record of $78.40 a barrel for US crude, OPEC has agreed on two output cuts, one of 1.2 million barrels per day, effective from November 1st and a second of 500,000 bpd from February 1st.