Too Early for Serious Rebound Until Production is Cut, Analysts Say

Analysts attributed the bounce to technically directed trading as the market recovered from trading below $44 a barrel Thursday and setting a new nearly six-year low at settlement. It also followed announcements by several oil producers—including  ConocoPhillips  and Shell—that they would cut exploration and production budgets amid a round of weak earnings. Still, they cautioned that there was little basis for a strong price rebound in the market without more substantive changes to the oversupply situation.

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“We see ongoing headwinds for oil prices,” Citigroup analyst Tim Evans said in a note. “Optimists may view the price performance in the face of bearish news as an encouraging sign, but we continue to see near-term downside risks.”

Light, sweet crude for March delivery was up 45 cents, or 1%, at $44.97 a barrel on the New York Mercantile Exchange. The global Brent contract was up 2 cents, or 0.1%, at $49.15 a barrel on the ICE Futures Europe exchange.

Overall, news in the market was bearish. Fourth-quarter U.S. gross domestic product came in at 2.6%, below the 3.2% average estimate of economists surveyed by The Wall Street Journal. European price data signaled ongoing deflation.

In addition, analysts estimated that the Organization of the Petroleum Exporting Countries produced more than 30 million barrels a day of oil in December, in the face of declining demand for the cartel’s output. Saudi Arabia made further reductions to selling prices for Europe and the U.S., and Iraq production is at or near 4 million barrels a day, according to London oil brokerage PVM Oil Associates Ltd.

“The market’s really fighting a losing battle here,” said Andy Lebow, a broker at investment bank Jefferies. “It’s hard to trace a meaningful recovery in the next few months.”

Oil futures have lost nearly 60% of their value since last June, as surging production from the U.S., Iraq and Libya have flooded the market at a time of weak demand growth as the global economy slows. The losses have stabilized somewhat in the last two weeks, but fundamental factors are expected to continue to deteriorate in coming months.

Indeed, market participants have been stunned by a pair of back-to-back U.S. inventory surges in domestic oil stockpiles in the last two weeks, with production reaching a 31-year high.

“Crude oil is once again dead-cat bouncing,” analyst Matt Smith of research consultancy Schneider Electric said in a note. “Meow.”

Major oil companies have announced spending cuts in recent weeks to cope with the price rout. Chevron Corp. said Friday that asset sales and strength in its refining segment helped offset tumbling crude oil prices, resulting in better-than-expected results in its December quarter. Still, Chevron said it plans to pare its capital spending by 13% this year to $35 billion.

Royal Dutch Shell said Thursday it would curb its planned spending over the next three years by some $15 billion and scale back investments in shale. ConocoPhillips also said it would slash its capital budget as the company reported losses in the fourth quarter of last year.

Crude’s price slump, however, is good news for the global economy, reducing gasoline prices at the pump and providing a boost to economic growth for net importers of oil.  Barclays  estimates that the halving in crude prices in the past six months, if sustained for the whole of 2015, would mean a transfer of $1.6 trillion from oil-producing to oil-consuming countries.

In refined products, February gasoline rose 0.28 cent, or 0.2%, to $1.3565 a gallon on the Nymex. February diesel rose 0.66 cent, or 0.4%, to $1.6520 a gallon.

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