BARCLAYS: The bottom is not in for oil prices

Oil prices are spiking in early trade on Thursday.

The current spike is being attributed to news out of Yemen that Saudi forces are bombing Houthi rebels in the country.

But in a note to clients on Thursday, analysts at Barclays said that oversupply in the oil market will likely push prices even lower in the second quarter of this year.

Barclays writes:

Following their precipitous decline in late 2014, energy prices have held up better in early 2015, with a consensus building that, especially in oil, the worst may be over as supply growth slows and demand picks up. However, we disagree; in our view oil prices have been supported by temporary factors that are fading fast and markets are likely to continue testing fresh lows for crude oil prices. We think a recovery in the second-half of the year is possible, but contingent on prices falling low enough over the next few months to substantially reduce potential non-OPEC supply growth and stimulate demand.

Barclays sees prices bottoming somewhere in the mid-$US30s for West Texas Intermediate crude oil and in the low- to mid-$US40s for Brent and expects “further widening in oil market contangos as more expensive storage needs to get incentivised.”

On Thursday morning WTI prices were around $US51.50 a barrel and Brent was trading near $US59 a barrel.

Over the last few months, the number of oil rigs in use in the US has collapsed, but Barclays doesn’t think that enough production has yet come offline for this to impact production. Barclays writes that, “The decline in US rig counts has been rapid and substantial (now down by almost 50% from its October 2014 high), but is unlikely to be an accurate signal of future production trends because usually when falling prices force rigs to decline it is those that are least productive that get cut first, while surviving rigs tend to be left on the most productive areas.”

Here’s the chart from Barclays showing production against rig counts and the build in crude inventories.

And the charts from Barclays showing the crash in prices and the forward curve showing lower prices for longer.

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