Oil held above $51 on Wednesday after falling more than 3 percent the previous session to its lowest level in 20 months, but investors were wary about taking short positions that would test the psychologically key $50 mark.
US crude futures for February rose 36 cents to $51.57 per barrel by 0719 GMT. Prices touched $50.53 on Tuesday, the lowest level since May 25, 2005, after Saudi Arabia said Opec production cuts were working well and there was no need for an emergency meeting of the producer group.
London Brent futures for the new front-month March contract were up 22 cents to $51.84. "The market is quite nervous about taking positions after seeing so many days of sharp drops in oil prices. Many are getting out of the market and cutting their losses," said Tetsu Emori, an analyst at Mitsui Bussan Futures in Tokyo.
"The market is also a little reluctant to take a short position because they are not sure if prices would actually fall below the psychologically important $50 line," Emori said.
Oil prices have fallen around 16 percent so far this year, in part due to warm weather in the US Northeast, the world's top heating oil market. Adding to the bearish news, the International Monetary Fund has revised down its 2007 estimate for global oil prices to $52.00 a barrel from a September forecast of $75.50, the fund's Managing Director Rodrigo Rato told Reuters on Tuesday.
Emori said he expected prices to drop further as the market remained strongly oversupplied and demand stayed weak. "Prices spiked in 2005 and 2006 because of large amounts of speculative funds flowing into the market. But many investors are now looking at the fundamentals of demand and supply, instead of pure speculation. That's why prices have fallen sharply and will fall further," he said.
Venezuela is more upbeat, however. "According to our view, the era of cheap oil is gone. Prices will stay where they are and they may go up to $60 a barrel in the near future," Luis F. Vierma, Venezuela's PDVSA vice president for exploration and production, told reporters in New Delhi on Wednesday. He added that crude oil prices may not go back to $30-40 a barrel as seen in the past.
As colder weather reached the region, heating demand in the US Northeast was forecast to rise above average early in the week, with Wednesday demand well above usual, private forecaster DTN Meteorlogix said on Tuesday. But the coming of the cold was a little too late to radically change the recent fundamentals, analysts said.
Analysts polled by Reuters expect US weekly oil statistics to show a build of 200,000 barrels in crude stocks last week, which would be the first rise in eight weeks, with imports rebounding from a steep drop the previous week. Distillate stocks were projected to have risen 1.5 million barrels, with gasoline seen rising 2.3 million barrels. The data will be released on Thursday, a day later than usual due to a US holiday on Monday.
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