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As winning streak falters analysts debate where next for oil

Oil well pump jacks located in Almond Orchard located over the Monterey Shale in San Joaquin Valley.
Citizens of the Planet | Getty Images
Oil well pump jacks located in Almond Orchard located over the Monterey Shale in San Joaquin Valley.

Oil prices traded lower in the early European session following the longest positive streak of the year for the commodity as analysts remained divided on where the price will head from here.

Brent had slipped back to trade at $55.87 at 10am London time after Monday's close cemented a six-day streak which saw prices up a cumulative 6 percent. Meanwhile, WTI was hovering a quarter of a percent lower for the session at $52.93, after notching up a fifth positive close for cumulative gains of 5.7 percent. So far in 2017, Brent is trading around 1.5 percent lower to Monday's close while WTI has lost 1.3 percent this year over the same period.

Among the bears, Stephen Jones, chief investment officer (CIO) at Kames Capital says that oil prices are unlikely to rebound significantly from here given a supply glut and increasingly sophisticated oil extraction methods.

Noting that spiking inventories and a big pullback in hedge funds' bullish bets are seen by many as short-term factors set to unwind, Jones says instead that the drastic reshaping of both supply and dynamics that has taken place will limit potential oil price rises.

"Having been through their own recession, U.S. exploration and production companies – and those focused on shale – are now able to operate in a lower oil price environment," said Jones, in a note to clients on Monday.

"That means the structural price of being able to get new oil supplies out of the ground has fallen, mainly thanks to significant improvements in the technical ability to produce oil, and therefore the price will remain lower than most people think," added the CIO of the British investment management business.

Turning to demand, currently registering 97.89 million barrels a day, Jones notes that it is failing to keep up with supply levels of 98.29 million barrels a day.

Taking a different view, Martin King, commodity analyst at GMP First Energy says his team has become notably more bullish in recent weeks on oil's path ahead, driven primarily by OPEC compliance results and its expectations for material growth coming through refinery runs.

Talking specifics, King highlighted in a client note on Monday that OPEC compliance has reduced daily production by around 1 million barrels a day since December while he sees refinery runs heading higher by around 2 million barrels a day over the next couple of months.

Furthermore, global oil inventories are also falling and U.S. inventories are not far behind, claim the GMP First Energy team, pointing to the example of Iran where the country's floating storage built during the years of embargo has been entirely drained in 6 to 9 months.

Yet, a rebound in prices may not be imminent, the team admits.

"It could still take a few more weekly reports of convincing inventory draws before prices work their way back to the recent highs seen in early March. Breaking out above those highs will require clear indications of significant rapid drawdowns in U.S. crude oil inventories. Still waiting for that," concludes the research.

Market participants are now focused on whether OPEC and its non-OPEC partners sign on to renew their agreement capping production in late May, a deal which has registered compliance figures north of 90 percent in recent months.

Yet despite the concerted efforts by certain key signatories, such as Saudi Arabia, to adhere to the production limits, the rate of U.S. shale production has offset the supportive effect on prices, said Michelle McGrade, CIO at TD Direct Investing on CNBC's Squawk Box on Tuesday.

"There are some conflicting forces out there. There's OPEC and there's U.S. shale gas and oil. U.S. is making shale oil like crazy and therefore the supply is greater than demand," McGrade opined.

Furthermore, beyond looking at supply and demand fundamentals, the ability for producing countries and large oil companies to balance their books is a critical factor to consider.

"This is the worrying thing…Not only these countries but also our oil majors as well. They need oil around…somewhere between $65 and $75 a barrel and once they get there that whole industry will relax - but it's just not getting there," McGrade noted.

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