Oil analysts say the strong production in the U.S. should ultimately wind down, as the output of some wells in operation declines and more wells are shut in. But for now, as seasonal factors like refinery maintenance affect demand, U.S. production could be a catalyst for even lower prices and a new bottom for crude.
"You could touch a surprisingly low price sometime in the next month or two," said Citigroup energy analyst Eric Lee. "As we get into summer, refineries come back from maintenance. Demand could pickup stronger than it was before the rig cuts and capex cuts, and globally there will be capex cuts starting to have an effect."
Lee and other analysts said West Texas Intermediate crude, at $50 per barrel Monday, could easily head toward $40 a barrel. The strong dollar is also a factor in oil's weakness.
"WTI could take another leg down," said Lee. "If there's enough distress, if imports into the U.S. don't budge, which they wont ... if exports don't rise quickly enough, which is a wild card, then producers at various locations need to shut in pipelines or run at low utilization so it doesn't come to Cushing."
Lee said if the market becomes very distressed, then the price could head to $40 per barrel and there is a chance it could see a price in the $20s before bouncing back to higher levels. West Texas Intermediate closed at a low of $44.53 per barrel Jan. 29, before moving higher during February.
Traders have been focused on the high level of oil storage capacity being used in the U.S., particularly at Cushing, Oklahoma, the storage hub for the benchmark West Texas Intermediate oil futures contract.
U.S. crude supplies are reported at their highest levels in 80 years, and analysts say as storage gets tight, prices for storage get higher, and that could result in more oil coming onto the market.
WTI was trading lower Tuesday, at $49.68, a decline of just over a half percent.
Cushing is the physical delivery point for the benchmark Nymex oil-futures contract, so futures prices are sensitive to supply levels there.
Andrew Lipow, president of Lipow Oil Associates, also expects to see $40 WTI before the shakeout is over.