Oil: A short slide
Experts say declining crude supplies and OPEC production cuts should leave prices bottoming out in the mid $50s.
NEW YORK (CNNMoney.com) -- After a two-day slide in oil prices totaling almost 9 percent, analysts see bottom. Two factors could keep oil from falling lower than the mid-$50s: OPEC production cuts and declining crude supplies.
"I think we're close to the end of the slide," said Phil Flynn, a senior market analyst at Alaron Trading in Chicago.
The recent decline to $55.59 is the result of several factors, including a relatively stable geopolitical scene and slowing economic growth in the United States.
A big factor is the higher-than-normal temperatures that have sapped demand for heating oil in the Northeast, the world's largest heating oil market.
But at the same time there has been a big drop in crude supplies, as reported by the government each week: Crude stocks fell by 1.3 million barrels this week, 8.1 million last week and 4.3 million the week before.
The declines were initially considered temporary, the result of a thick blanket of fog around the Houston area that prevented ship deliveries. But Flynn notes that supplies have not rebounded. "The channels are [now] open, why didn't we see a big build this week," said Flynn. "We're losing our big supply cushion."
Another reason to suspect the slide is over: OPEC. "Could we see $50 next week? I don't think so," said Adam Siemens, chief energy economist at Deutsche Bank. "If we get to $55 OPEC will go crazy."
OPEC agreed to cut production by 1.2 million barrels a day Nov. 1, and has agreed to another 500,000 barrel cut slated to begin Feb. 1.
So far about three quarters of the 1.2 million barrel a day cut has been implemented, but OPEC has sometimes had a hard time getting its member nations to actually abide by agreed-to cuts.
The cartel's ability to deliver on its proposed cuts is something traders will be watching over the next several weeks. Failure to deliver could send prices even lower than the mid-$50s.
"By the end of February we could see a number between $50 and $55," said Peter Beutel, an oil analyst at Cameron Hanover.
But other analysts said oil prices too much below $55 may even prompt an OPEC emergency meeting and further production cuts.
A rally in prices will be tough to sustain, however, unless demand picks up. Andrew Lebow, an oil broker at Man Financial in New York, noted EIA's demand numbers for December, which showed a 3 percent drop from a year ago. "That's a pretty big number," said Lebow.
Still, "It's really hard to believe the market is going to collapse right now," he said, also predicting prices would stabilize in the mid-$50s. "We still have two months of winter left."