Crude oil remains in the doldrums, with the West Texas Intermediate benchmark hovering around the US$35 per barrel mark. While demand was soft when prices began to slide in mid-2014, the prolonged period of market weakness has largely been a supply-side story, with producers fighting for market share. In fact, prices have remained weaker for much longer than most would have anticipated. OPEC's latest decision to maintain elevated output levels suggest that the cartel is unlikely to abandon its strategy and embark on production cuts anytime soon. If this is the case, what will be the catalyst for a recovery in market sentiment and prices - even a modest price increase? Three conditions need to change to help increase the price: a tightening in market conditions, signs of improvements in emerging markets, and a pullback in the U.S. dollar. Over the last few months, the world has been producing roughly one-and-a-half to two million barrels per day in excess of demand. It will largely be up to the supply side to bring the market back into balance; which will take some time. OPEC has been producing about two million barrels per day above its self-imposed quota, with output in Saudi Arabia, Iraq and Iran up significantly. Most OPEC countries need higher prices in order to balance their fiscal books and have been pushing for a cutback in production. But, given Saudi Arabia's dominance within the group, nothing will change until they are onboard. This is unlikely, as the Saudi's have enough financial reserves to withstand lower prices for some time to come. There is also potential for OPEC's output to rise even further in the near term as sanctions against Iran should be lifted in the spring. Iran has already been ramping up production. What has been severely impacted is the investment in the oil sector in non-OPEC nations, as current prices are below the break-even costs for many new projects. For 2016, U.S. production is likely to fall to a range more in line with 2014 levels. The Canadian dollar is providing some cushion to the plunge in oil prices. It is expected that Canadian production will rise moderately through 2018 before it becomes flat. Some easing in fears around emerging markets- particularly in China given that it is a key oil consumer - should lead to more optimism in the latter part of 2016. Once there is evidence that the recently implemented stimulus measures are having a positive impact on the Chinese economy, market sentiment toward the country, and more broadly, across other emerging markets should improve. As well, a pullback in the U.S. dollar could also lend support, as the two are strongly (inversely) correlated. A higher greenback makes oil- which is priced in U.S. dollars- more expensive for consumers outside the U.S., thereby weighing on demand. The recent appreciation of the currency has certainly not helped non-US demand, although the supply glut had undoubtedly been the key factor behind lower prices. Going forward, differing monetary policies between the U.S. and many other countries around the world will likely lift the greenback through early 2016; however, it should lose some ground thereafter as the peak divergence in monetary policy passes and improvements in economic activity elsewhere buoy sentiment for other currencies. This depreciation should bode well for oil prices as well as market sentiment. Overall, prices are expected to remain quite low through the fist half of 2016, before a weaker U.S. dollar, more optimism surrounding emerging markets, and a tapering off of production - particularly in the U.S. - triggers expectations for a more balanced market, helping to lift prices to $55 per barrel by the end of the year.

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