After a stellar month for beaten-down oil markets, the risk of another sharp slide downwards may be around the corner, analysts said Friday.
Brent crude and West Texas Intermediate (WTI) futures, the two global benchmarks for oil prices, rose almost 20 percent last month. Oil markets delivered their best monthly gains for six years thanks to weakness in the U.S. dollar and a view that the global supply glut would abate.
The bounce followed a rout in oil markets that started last June and saw prices halve in value from peaks above $100 a barrel.
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"The reality is that this rally is probably premature. Fundamentally, the market is over supplied," Energy Aspects Geopolitical Analyst, Richard Mallinson, told CNBC. He added that crude stocks were building up at a fast pace because of a period of high refinery maintenance around the world.
"Also, OPEC producers led by Saudi Arabia are putting out well above their quota," he said, referring to the Organization of the Petroleum Exporting Countries (OPEC), which has an overall output target of 30 million barrels per day.
"I think we're in for quite a significant correction and actually, the higher prices go now, the further they'll have to correct before they can rally later in the year."
Brent crude oil prices were hovering around $66.50 a barrel on Friday, within sight of a 2015-peak of $66.93 set a day earlier.
U.S. crude oil prices, meanwhile, traded at $59.60 –staying close to the previous day's 2015-peak.
Triggers
Tom Pugh, a commodities economist at Capital Economics in London, said he expected prices to stay around these levels for the next two years and, within this, "there should be a correction and we don't rule out another sharp fall."
"The two possible triggers for this could be a nuclear deal with Iran in June or next year when Iranian oil is expected to come into the market," he added.
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Talks between six world powers and Iran over a deal to restrict sensitive nuclear work in return for an easing of sanctions are nearing their final stages. There is a June 30 deadline for the discussions.
Analysts have said that any easing of sanctions on Iran could turn the tap on its oil exports, bringing more supply on to the market and putting downward pressure on prices.
According to the U.S. Energy Information Administration (EIA), Iran holds nearly 10 percent of the world's crude oil reserves and 13 percent of OPEC reserves.
How low?
Analysts said while they expected a correction in oil markets, they did not expect oil prices to fall to the lows seen in January of around $46 a barrel on Brent futures, and around $44.3 for WTI set in March.
"I don't think we will get back down to the $45 a barrel area, but a pull back to around $50 is possible," said Capital Economics' Pugh.
Mallinson at Energy Aspects added that a better outlook for demand growth should help provide a floor for oil prices.
"By the third and fourth quarters we should see a better balance between demand growth and supply slowdown and that should help prices rise in a more sustained way," he added.
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