Oil bears beware, downside risk in crude may be limited

Oil futures declined on Tuesday, with WTI crude falling back below $29 a barrel after the U.S. Energy Information Administration (EIA) cut its 2016 outlook for oil prices. The agency now expects WTI to average $37.59 a barrel this year compared with a previous forecast of $38.54 a barrel.

Worries about a global supply glut continue to weigh on the markets. U.S. gasoline futures fell to a 2008 low ahead of weekly inventory data expected to show crude and gasoline stocks growing to record highs.

But there may be an end in sight for the recent pain in crude prices. The downside risk for oil is becoming limited, according to Bill Baruch, chief market strategist at iiTrader.

“We think there is a bottoming process happening here for oil,” said Baruch. "In the longer run there will be  opportunities to be a buyer. This volatility is great."

Baruch expects a decline in U.S. production will help spark a rebound in crude in the final three months of the year. “We expect to have a recovery in the fourth quarter as production in the U.S. starts to fall off. I think we’re going to have a nice move in the fourth quarter above $40 per barrel.”

U.S. energy firms have cut rig production for seven straight weeks, according to data from Baker Hughes. The number of active U.S. oil-drilling rigs edged down by 31 to 467 as of last Friday. The total active U.S. rig count, including natural-gas rigs, is down 48 to 571.

There was no sign of cooperation between OPEC and non-OPEC suppliers after talks between Saudi Arabia and Venezuela on Sunday failed to produce progress on oil production cuts.

The IEA said that global oil supply dropped 200,000 barrels a day in January, as higher OPEC output only partially offset a drop in non-OPEC production. For 2016, non-OPEC output is expected to decline by 600,000 barrels a day.