Oil Perky On Potential Feb OPEC Meeting; Market Wary - Analysis

Oil spiked higher Thursday in response to reports of a potential OPEC meeting to take place in February to discuss cuts in oil production.

Headlines, alluding to such a meeting, swirled in morning action, with West Texas Intermediate posting a high near $34.82, the highest level since January 6, when prices topped out at $36.39.

WTI subsequently retreated, but held well above Wednesday's settlement of $32.30 in afternoon action, which traders took as a sign of modest optimism that a deal may indeed be carved out at some point soon.

"Petroleum prices are on the upswing after Russian Energy Minister Alexander Novak said a meeting with OPEC oil ministers would take place in February to discuss a prior Saudi Arabian proposal centered around a 5% cut in production," said Tim Evans, energy futures specialist at Citi Futures and OTC Clearing.

"So far, OPEC oil ministers have been unable to confirm the meeting, which may hinge on Saudi Arabia's willingness to change course," he said.

Saudi Arabia has stressed that non-OPEC production must be included in any deal, which means that Russia will also need to participate.

"Rising production from Iraq and Iran's return to the market may also stand in the way of any deal," Evans warned.

"It's also worth noting that Russian oil production may have reached a new record level of 10.89 mmbpd during January, once again showing that non-OPEC production has been resilient in the face of low oil prices," he said.

Barclays commodity analysts were "highly skeptical that such a meeting will result in credible cuts in supply."

"Thus, we see this as nothing more than an attempt to shift market sentiment, and we do not expect that it will change the physical market imbalance," they said.

Julian Jessop, chief global economist at Capital Economics was also a skeptic.

"To the extent that the wealthier Gulf producers are tolerating lower prices to protect market share, there are already plenty of signs that this policy is working," he said, noting that "the number of active drilling rigs in the U.S. has collapsed and shale production there is now falling."

In addition, despite headlines to the contrary, oil demand was up in the second half of 2015, which suggested "oil prices will recover further of their own accord, without the need for a deal between key producers," he said.

Even if Saudi Arabia did agree to coordinated output cuts, it is not clear that Russia would be on board given the recession the country is facing and Jessop reminded that in 2001, Russia reneged on a similar deal.

Any sustained oil recovery would need to be "built on stronger foundations than comments from one or two Russian officials," he said.

Capital Economic's year end-2016 forecast for oil to "rebound to $45 relies instead on cuts in non-OPEC supply, led by falls in U.S. production, and on a further improvement in global demand."

For now, Jessop said they stick to their forecast of $30 for the end Q1 2016.

Despite market doubt, oil prices, while off the best levels of the day, remained somewhat buoyant Thursday afternoon.

NYMEX March light sweet crude oil futures were up $1.13 at $33.43 per barrel Thursday, after trading in a $31.74 to $34.82 range.

From the 12-year low of $26.19, posted on Jan. 20, to today's peak, WTI was up nearly 33%.

A close above $33.73, which is the 61.8% Fibonacci retracement of the decline seen from the Jan. 4 peak of $38.39 to the Jan. 20 low of $26.19, would be deemed positive and suggest scope for further gains.

A close above $35 would be welcomed, but market players will rest easier if WTI can vault its 55-day moving average, which comes in at $36.73 currently.

Crude has traded below its 55-day moving average since early November.

"We are already seeing technical dynamics suggesting the bottom is near though further confirmation would come with a close above $32.40 on WTI (Weekly at a minimum)," said technical analysts at CitiFX.

"Prior major oil collapses have been followed by rallies averaging 100%-plus," they said.

From current crude prices, "that would suggest a move towards $50," which is "still significantly lower than just a few years ago," Citi FX said.

Such a moderate recovery in oil would maintain "a positive dynamic for consumers/Oil importers, but also gives some breathing room to Oil producers)," the analysts said.

"Should this development play out, it would have a positive feedback loop across many assets," CitiFX said.

ICE Brent last traded up $1.00 at $34.10 per barrel, in the middle of a $32.56 to $35.84 range.

Brent has seen a range of $27.10, seen Jan. 20 to $38.99, seen Jan. 4, so far this month. It's 55-day moving average comes in near $37.94 Thursday.