Banks are getting bearish on oil again.

Analysts have cut their outlook for oil prices for the first time in four months, concerned about the continued oversupply in crude that has already sunk this year's market rally.

A survey of 13 investment banks by The Wall Street Journal predicts that Brent crude, the international oil-price benchmark, will average $56 a barrel next year, down by more than a dollar from June's survey. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $55 a barrel next year, down almost a dollar from the previous survey.

Oil prices nearly doubled earlier this year amid expectations that falling U.S. production would help alleviate the oversupply that has plagued the industry for the last two years. But that rally has petered out in recent weeks as big oil producers increase their output and gasoline inventories continue to swell.

"There is still a lot of oil out there and the sentiment is pretty bearish," said Michael Wittner, chief oil analyst at Socié té Gé né rale SA "For the time being, the path of least resistance for oil prices continues to be lower."

U.S. crude entered a bear market earlier this week, dipping below $40 a barrel for the first time since April. In early morning trade Thursday, Brent was trading down 0.7% at $42.79 a barrel, while WTI was down 0.3% at $40.71 a barrel.

The banks in the survey see oil prices staying below $50 a barrel until the end of this year and rising to $60 a barrel by the end of next year. Last summer, many of the same banks were predicting oil prices would rise to more than $70 a barrel this year.

At the end of July, hedge funds and other speculative investors had cut their bullish bets on Brent to their lowest in more than five months, data from the Intercontinental Exchange Inc. showed on Monday. Last week, speculative investors in U.S. crude added nearly 15 times more bets on the crude price falling than on it rising, according to data from the U.S. Commodity Futures Trading Commission.

One of the main culprits for the reversal in the oil price is a growing glut of gasoline around the globe. Refineries have taken advantage of the fall in oil prices and gone on a buying spree in the past two years. Consumption hasn't been able to keep up with the new production, leading to near-record 500 million barrels of gasoline put into storage around the world, according to Citigroup Inc.

Few oil producers, meanwhile, show signs of cutting output. Russian production is running near the post-Soviet high it reached earlier this year. Production from Canada and Nigeria, where a spate of outages knocked off more than 3 million barrels a day in the spring, is now coming back online.

While U.S. crude output continues to decline—last week output fell to 8.5 million barrels a day, from 9.5 million the same time last year, according to official data—some drillers have ramped up activity in recent weeks.

On Friday, Baker Hughes Inc. reported that the number of rigs drilling for crude in the U.S. has risen by three to 374, the fifth straight week of increases. That could slow production declines and even cause output to start rising again, analysts say.

"The timeline for market rebalancing has slipped in recent weeks, through a combination of weaker demand growth, a quicker rebound in supply from Nigeria and stronger-than-anticipated output from Saudi Arabia, Russia and others," analysts at J.P. Morgan said in a recent report.

Concerns about the global economy have also clouded the outlook for crude. Analysts say that Britain's surprise vote to leave the European Union in June could have knock-on effects on oil demand in Europe, given its likely impact on the regional economy.

Still, few analysts expect prices to fall to the decade lows of below $30 a barrel that were hit in the first quarter of the year. That trough was reached as the global oversupply hit its highest level.

"The global market is getting back into balance in the second half of this year and the beginning of next," said Mr. Wittner of Socié té Gé né rale, who expects crude prices to bottom out in the high $30 range. "We're not going down forever."

 

(END) Dow Jones Newswires

August 04, 2016 07:15 ET (11:15 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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