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Oil rallies hard, but this is not the bottom

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Oil surged above $30 a barrel temporarily in the biggest relief rally in three months, but crude has still not found a floor and U.S. economic data and earnings season could play a big role in driving prices in the near term.

Oil and other risk assets were boosted Thursday by dovish comments from European Central Bank President Mario Draghi, who said it would be necessary to review the central bank's monetary policy stance in March. That sparked expectations of more quantitative easing from the ECB.

Crude settled up 4.2 percent Thursday at $29.53 per barrel after rising more than 6 percent earlier in the session. Traders also found a silver lining in an otherwise bearish U.S. government inventory report which showed a build in oil supplies and another big 4 million barrel build in gasoline supplies. Encouraging to bulls, however, was the increase in distillate demand and drawdown of 1 million barrels in distillates, or diesel and heating oil.

"Our view is that prices should average in this range for the quarter," said Michael Cohen, head of energy commodities research at Barclays. "We don't see levels below this as being sustained. This is in line with our forecast. We also think the market is prone to these types of moves, given the positioning."

Blanch: Too early to call an oil bottom

Oil was pounded Wednesday as the February contract expired for West Texas Intermediate crude futures. It took another hit in late afternoon trading when American Petroleum Institute data showed a big build in crude and refined products, even more bearish than the U.S. Energy Information Administration report Thursday.

"Demand for petroleum is not so bad so when you look at it, maybe some of the extreme short positioning is a little unreasonable," said Bart Melek, head of commodities strategy at TD Securities. "I think we're seeing some short covering. I don't think people are going long on this. This is still a very volatile situation. We don't know what's happening on the macro side. We haven't had any U.S. data lately and next week we're going to get quite a bit."

Markets will be bombarded with U.S. economic reports next week, plus a Fed meeting. The Fed is not expected to move on interest rates but traders are now expecting its statement to carry a more dovish tilt, given market conditions.

Read MoreOil spikes above $30

In addition, there is a heavy calendar of U.S. economic reports including Friday's GDP, Tuesday's consumer confidence and Thursday's durable goods. There is also the employment cost index, consumer sentiment and lots of housing data.

But earnings could also start to play a role in energy markets, as investors watch to see if energy companies talk about production cuts, cap ex reductions or layoffs.

"We've seen a pipeline company, a natural gas company and a very large Canadian production company coming in and announcing big cap ex cuts and firing of employees," said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch. "There's a big reduction in spending going on, and we'll see more of that next week when other corporates report earnings."

Blanch also said oil is not at a bottom but it's getting closer.

Halliburton, Murphy Oil and refiner Valero are among those reporting next week, and Exxon Mobil and other majors report the week after.

The U.S. energy industry is made up of dozens of companies from mom and pops to the oil majors. Analysts have been expecting more of the small, borderline well operators to shut down low-producing wells. The elimination of dozens of wells so far has not resulted in a big drop in U.S. production due to improving efficiencies, and U.S. production actually showed a slight increase in the past week to 9.3 million barrels a day. 

Traders have been watching the high-yield debt market where energy issuers have seen huge markdowns, on expectations that some will be forced to either go bankrupt, sell assets or merge.

The shakeout in the industry had been expected much sooner, and it has taken oil prices to lower prices for much longer than initially expected. 

"I think there's going to be a fairly lengthy consolidation process here. But I think the market is signaling to us that it's ready to go up on any positive news, if it's going to rally on the DOE number," said Melek. "...[N]o one is making any money, and you're going to see massive attrition in the nontraditional space faster than many forecasts are thinking."

Melek said it's now up to producers and whether they can hang on. "It depends on how long you're going to remain solvent. How good are your lines of credit?" he said. "That will determine the speed and magnitude of attrition. They can't cover these operations."

Another negative hanging over the oil market is the very strategy that caused prices to crater. 

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OPEC drove already falling oil prices into a tailspin when it initiated a policy in November 2014 of letting the market set prices. Saudi Arabia is behind that strategy, and on Thursday the chairman of its national energy company reaffirmed that position.    

Khaled al-Falih, chairman of state oil company Saudi Aramco, said the kingdom could withstand low crude prices for a "long, long time" and that it would not act alone to support the market.

Blanch, speaking on "Fast Money Halftime Report," said there are no signs OPEC will change course even though some of its members are pumping oil at a loss. 

"OPEC has always acted behind big demand events — 1998, 2001, and 2008 — but this time around, it's a supply event. There's a price war going on between the cartel and non-OPEC producers, but more recently between Saudi Arabia and Iran, as the two refuse to cooperate to balance production even within the cartel," said Blanch.