Barclays: Oil Prices Have to Move Lower to Impact Supply

Oil prices slid on Monday amid concerns that oil's February rally isn't sustainable.

Crude oil futures rose last month, snapping a seven-month losing streak, on hopes that supply cuts in the U.S. will alleviate the global glut that drove prices off a cliff last year. But analysts cautioned there are little signs yet of declining production and prices could fall again before they recover.

On Monday, Brent crude for April delivery fell 2% to $61.32 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, light, sweet crude futures for delivery in April traded down 1.9% at $48.80 a barrel.

Brent, the global oil benchmark, gained 18% in February registering the sharpest monthly increase since May 2009. It outpaced U.S. oil prices, which rose 3.2% for the month pressured by record-high inventory levels.

Prices have been supported by a fall in the number of oil drilling rigs in the U.S., which is seen as a leading indicator of production. But while the rig count is down 31% from a year ago, the pace of decline slowed last week, falling by 33 rigs to 986, data from Baker Hughes showed on Friday.

Analysts at Commerzbank said that the slowdown can be explained by the recent strength in prices. "If this trend were to continue, the expectation of a noticeable reduction in U.S. oil output in the second half of the year could be disappointed," the bank said in a note to clients.

Meanwhile, latest Chinese manufacturing data didn't provide much optimism for oil-demand growth.

Over the weekend, China's official manufacturing purchasing managers index for February posted a contraction for the second consecutive month. Earlier Monday, the HSBC China manufacturing PMI rose to a final reading of 50.7 in February from 49.7 in January. Additionally, China's central bank cut interest rates and economists expect more easing measures to follow this year.

China's net imports of petroleum products in January were down sharply by 48% from a year earlier, due to weak domestic demand, increased domestic refinery capacity and changes to import taxes, analyst Ivan Szpakowski at Citi Research said.

According to analysts at Barclays, oil prices will have to move lower to create a meaningful impact on supply reductions, before the market can balance in the first half of the year. The bank sees Brent averaging $47 a barrel in the second quarter, down from this quarter's anticipated $53 average.

"The necessary great rebalancing of the oil market is still months away, and we think that the oil price is likely to test its mid-January lows again soon," Barclays said.

Nymex reformulated gasoline blendstock for April--the benchmark gasoline contract--fell 1.6% to $1.9459 a gallon, while ICE gas oil for March changed hands at $587 a metric ton, down $6.75 from Friday's settlement.

Eric Yep contributed to this article.