Oil prices have continued to yo-yo over the past few days, with a bounce induced by the conflict in Yemen fading this week. A sustained recovery looks unlikely for the next few months. Yemen is a small supplier, and the fighting has yet to disrupt trade routes.
Investors are also keeping an eye on the West's talks with Iran. A deal would raise the prospect of even more oil supplies hitting a market already beset by a glut.
Meanwhile, the price drop hasn't hit production as hard or as fast as manyhad expected. The number of active American rigs has roughly halved, says Capital Economics. But it will be some time before production levels out.
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Once a shale well is drilled, operating costs are only around $10-$20 a barrel. There is a big backlog of wells already drilled that are yet to start producing.The upshot is that US production will only peak in the summer, and decline slowly over the rest of the year.
There are signs, however, that falling prices are boosting demand. US petrol consumption has started rising, even before the driving season begins. European economic data are also looking stronger, which implies rising oil demand.
Meanwhile, the rise in the US dollar could slow or pause if markets start to believe that US interest rates will rise later rather than sooner. This bolsters all commodities, as they are priced in US dollars. As a result, Barclays expects both Brent and WTI (the US benchmark) to bottom in the second quarter, with Brent averaging $55 in the fourth quarter.
