Oil prices recovered from earlier losses overnight, but it might not be a rebound and could simply be markets taking a "breather," analysts said, warning that crude prices could turn negative again.
That's because the underlying issues with weak demand and storage running out have not been resolved, and will continue to put pressure on energy prices.
U.S. oil prices as well as international benchmark Brent crude have see-sawed this week. The May contract for U.S. benchmark West Texas Intermediate dived deep into negative territory earlier this week, for the first time in its history, and traded at negative $37.63 per barrel. That meant producers had to pay traders to take the oil off their hands.
While the Brent tumbled overnight to its lowest since 1999, at $15.98, it did not enter into negative territory.
Overnight, however, the June contract for WTI surged 19% to settle at $13.78 per barrel. Analysts attributed that to tensions in the Persian Gulf as U.S. President Donald Trump threatened to "shoot down and destroy" Iranian gunboats if they "harass" American ships.
"I'm not even calling this a rebound. I think oil prices are taking a breather," Vandana Hari, founder of Vanda Insights, which provides analysis on global energy markets. WTI last traded at $15.66 per barrel on Thursday afternoon, a far cry from levels around $60 at the beginning of this year.
"As it happened, it's not really managed to prop prices up too much," she told CNBC on Thursday, referring to the U.S.-Iran tensions. "I think the geopolitical tensions element ... at this point to the markets is extremely small."
Instead, Hari pointed to the key factor of global lockdowns as the current pandemic continued to take its toll, which would continue to weaken demand and hurt oil prices.
"The downward pressure on oil prices still remains immense. What has turned dramatically in terms of market sentiment, especially this week ... is that the demand sentiment has turned much more negative because of the continuing lockdowns," she said.
"Countries that have found a flattening of the curve ... are being extremely cautious. A lot of countries are seeing some sort of a resurgence in infection rates. Essentially, what we have is a picture of a world that doesn't know its way out of this pandemic and the associated lockdowns."
ANZ Research's John Bromhead also said in a note on Thursday: "News that President Trump had ordered the Navy to shoot down Iranian gunboats may have been the spark that started the rebound. But the backdrop is poor with weak demand and rising inventories."
Oil demand has been badly hit as travel restrictions remain in place in many countries and people are told to stay home. Both air and vehicular travel have come to a virtual standstill, among other factors.
That plunging demand has caused oil supply to rapidly build up — and main storage facilities are quickly running out of capacity.
It has hit U.S. crude particularly hard, with the country's main storage facility at Cushing, Oklahoma set to be full within weeks. Tanks in that facility, a major trading hub for crude oil, are likely to reach full tank capacity by mid-May, according to an estimate by American global investment management, BlackRock.
The lack of storage is one main factor pushing down the nearer-term May contract for WTI, which expired on Tuesday, to negative. The collapse of WTI into negative prices is unprecedented.
In the near term, unless production is cut, the limited capacity to store oil will likely put pressure on crude prices, analysts say. It could even bring the June contract for U.S. crude — which has last above $15 a barrel — into negative levels as well, according to them.
"There is a possibility that the circumstances seen early this week could repeat itself for the June WTI contract, given the oil storage issues plaguing the market that look to persist, at least in the short term," Peter Kiernan, lead analyst for energy at The Economist Intelligence Unit, told CNBC in an email.
Brent oil may not be as badly affected by storage issues as it is transported by sea, said Kiernan. Brent is priced on an island in the North Sea roughly 500 meters from the water, where tanker storage is accessible. In contrast, WTI is landlocked and 500 miles from water, making it tougher for global markets to take delivery.
Nemo Qin, senior analyst at investment platform eToro, said that other factors, such as an oversupply of oil without further production cuts, could still pressure Brent prices.
"Although the OPEC and Russia and other non-OPEC oil-producing countries recently reached a historic agreement to scale back production, this will still not be enough to manage the global oversupply of oil," he told CNBC via email.
With an estimated record of 160 million barrels of oil now held in floating storage on ships, oil traders are scrambling to find alternative storage options for crude both on land and at sea, Reuters reported on Friday, citing unnamed shipping sources.
"Unless global lockdown measures are eased, or a further production cuts are agreed upon, there is a very real possibility that we'll see a free-fall in the price of Brent Oil futures, and a chance that it will trade at a negative price in the short term," Qin said.
— CNBC's Sam Meredith contributed to this report.