Oil back towards US$56 but outlook still fragile, say traders

London

OIL rose towards US$56 a barrel on Thursday, recovering from part of the previous session's drop, although traders and analysts said the prospect of a further, sustained rally from near six-year lows looked weak.

Crude snapped a four-day winning streak on Wednesday, when the US government said crude inventories increased by 6.3 million barrels, rising for a fourth consecutive week to hit a record high.

While the global market has more than enough crude, a collapse in Libyan production and a raid on an oilfield by gunmen, plus an attack on a tanker off Nigeria renewed concern about threats to supply.

"The market is all over the place right now," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. "The overriding story right now is the rise in supply."Oil's swings have intensified since Opec decided in November to let rival producers deal with a global surplus that Iran's oil minister pegged at 2 million barrels a day in an interview with state television. That's about 6 per cent of the group's production last month of 30.9 million barrels a day.

Brent crude rose US$1.69 to US$55.85 a barrel by 1345 GMT, having fallen more than a dollar intra-day earlier and settling 5.5 per cent lower on Wednesday. US crude added US$1.35 to US$49.80. "There's more and more money coming in on the long and the short side, and I think the result of that is we'll probably see increased volatility," said Olivier Jakob, oil analyst at Petromatrix. "If we start to have more problems in Nigeria, then it starts to reduce the spare capacity that there is and then it's harder to make the case that oil should be at US$30." Oil began to rise last week from near-six-year lows, in part due to a downturn in US rig activity that could eventually dampen rapid growth in shale oil production, only to tumble on Wednesday.

Other participants said it was too soon to expect a sustained price rise. "There's no basis for a sustained recovery at the moment," said Carsten Fritsch, analyst at Commerzbank.

Christopher Bellew, a senior broker at Jefferies Bache, also did not expect prolonged gains. "I think prices will consolidate around these sorts of levels before moving lower. It takes a lot of time for fewer rigs to translate into lower oil production," he said.

A workers' strike in the United States at nine plants, including seven refineries accounting for 10 per cent of the country's refining capacity, added to concerns over crude demand. REUTERS, BLOOMBERG