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Caution urged as oil prices rebound after near six year lows

Brent was trading roughly 50% below its June 2014 peak as Petroleum Economist went to press.

Oil prices rebounded from near six-year lows in January as the markets rallied on news of a steep drop in the US rig count and relatively positive US economic data. Brent was trading at $60.24 a barrel (/b) – roughly 50% below its June 2014 peak - and WTI at $50.67/b as Petroleum Economist went to press.

Oil prices began falling in June 2014 as traders reacted to a growing supply glut, but prices have picked up since mid-January, with Brent gaining almost $20/b to touch $63/b by mid-February as long-standing short positions were closed in reaction to the decline in the US rig count.

Traders were also starting to see light at the end of the tunnel following a spate of announcements from oil companies offering insights into the full scope of their budget cuts.

Yet the International Energy Agency (IEA) warned that supplies so far remain abundant, and it will take time for investment cuts to make more than a relatively small dent on production. Barring any unforeseen disruption, OECD stocks may, by mid-2015, come close to revisiting the all-time high of 2.83 billion barrels hit in August 1998, shortly before WTI prices sank to an average monthly low of $11.22/b.

The IEA cautioned that supply responses can take months, if not years, to be felt. And despite expectations of tightening balances by the end of 2015, downward market pressures may not have run their course just yet.

While US drilling has slowed since the start of the year as producers reacted to the collapse in oil prices, analysts reported the pace of US rig count declines was now slowing, triggering the latest dip in prices.

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