By Christopher Johnson (Reuters)
LONDON - Oil prices steadied on Tuesday after a sharp sell-off as a fall in the dollar triggered a bout of short-covering, but analysts said the market looked vulnerable to further falls.
Rising oil prices through December encouraged investors to buy large volumes of crude oil futures contracts and many of these "long" positions are likely to be unwound unless the market stays strong, analysts and brokers say.
"I see this as a dead cat bounce," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen. "Oil is unlikely to recover until the longs have been reduced."
Tamas Varga, analyst at London broker PVM, agreed:
"We are seeing some short covering on the back of a weaker dollar," Varga said. "We might see stronger prices today after yesterday's big fall, but the market should weaken in coming days. I believe we are going lower."
Oil is priced in dollars, so a weaker dollar tends to encourage buying by consumers holding other currencies.
Brent crude <LCOc1> was up 10 cents a barrel at $55.04 by 1310 GMT. U.S. light crude oil <CLc1> was up 10 cents at $52.06.
Both crude contracts fell more than $2 a barrel, or around 4 percent, on Monday on doubts that the Organization of the Petroleum Exporting Countries and other key oil producers would cut output as promised to try to reduce a global oversupply.
OPEC members such as Saudi Arabia appear to be reducing production but it is not clear whether other big producers such as Iraq will follow suit.
Iraq said on Tuesday it would raise crude exports from its main Basra port to an all-time high in February.
"The market rallied more on faith than fact, so there is plenty of room for disappointment if producers fail to deliver cuts," Harry Tchilinguirian, global head of commodities strategy at French bank BNP Paribas, told Reuters Global Oil Forum.
Supplies are also increasing in North America.
The average Canadian rig count for December 2016 was 209, up 36 from the 173 counted in November 2016, and up 49 from the 160 counted in December 2015, said Matt Stanley, a fuel broker at Freight Services International in Dubai.
"A 30 percent increase in Canadian rigs in a year ... The bear in me is well and truly back," Stanley said.
(Additional reporting by Henning Gloystein in Singapore; Editing by Susan Thomas, Greg Mahlich)