Beware, oil rally is 'premature': Analyst

Oil rally is premature: Commerzbank
Oil rally is premature: Commerzbank

Anyone hoping the recovery in oil prices is here to stay could be in for a rude awakening, as prices could fall below $50 a barrel on a glut of supply, a commodities expert warned on Monday.

U.S. West Texas Intermediate (WTI) and Brent crude oil hit six-year lows in January, but have recovered somewhat on the back of a decline in U.S. rig counts and geopolitical tensions in the Middle East, which have taken supply out of the market.

Eugen Weinberg, head of Commodity Research at Commerzbank, told CNBC Monday that while he wouldn't rule out further price rises, the rally in oil prices was "premature." He added that the price of U.S. crude could fall below $50 should the rally stall.

"I wouldn't be surprised if we saw the current $59 go even below $50, should this rally stall and should we come to this correction," Weinberg told CNBC on Monday.

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"I think it's more hopes driving the market rather than the real facts. I wouldn't be surprised to see a short-term correction, a strong correction because of all the fundamental data," he said, adding "I think the rally is premature and would be probably looking for the prices (to go more) below $60 in a month's time than above $70, for Brent."

Rusted out 'pump-jacks' in the oil town of Luling, Texas.
Getty Images

Oil prices came under pressure earlier on Monday, after the latest data from China showed its vast manufacturing sector continued to contract in April, potentially hitting demand from the country for oil.

Following the China data, benchmark Brent crude traded around $66.85 per barrel, with U.S. crude around $59.38.

Last week, however, both benchmarks hit peaks for 2015, prompting hopes that oil prices could be on the road to recovery after their sharp declines from last June, when prices were around $114 a barrel.

Oil prices have fallen on the back of a global glut in supply and lack of demand. Exacerbating this was the decision last year by the Organization of the Petroleum-Exporting Countries (OPEC)—a group of 12 oil-producing countries led by Saudi Arabia—to hold production at 30 million barrels a day in order to retain market share—and potentially put rival U.S. producers out of business.

Despite data suggesting U.S oil output may yet fall, as producers struggle to meet production costs amid lower oil prices, Weinberg said: "The supply and demand situation is quite bleak at the moment."

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"At the moment, the market is more thinking in terms of the prices, than concentrating on fundamentals," he said, adding that supply showed no signs of falling yet, a factor which could support prices.

"The fundamentals are quite bleak and should Iran's (supply) come back on the market, should Libya come back on the market then we'll have a two-year supply in the market—even without OPEC itself reducing or increasing production—so I think the situation is justifying much lower prices than the markets hope," Weinberg added.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.