Analysts remain bullish on oil despite fears that slumping prices could cause the Organization of the Petroleum Exporting Countries to abandon its six-month output agreement when the group meets this coming May.

Crude took a big tumble last week and had fallen to a three-month low on Tuesday on worries that U.S. storage levels were too high, suggesting OPEC’s decision in November to curb oil supplies is not having its intended effect.

Oil prices on Wednesday regained some of their recent losses, but remain below the US$50-per-barrel threshold. Futures prices for West Texas Intermediate on Wednesday traded around US$48, up roughly two per cent from the previous day.

Slumping oil prices has again tested the resolve of OPEC’s largest producer Saudi Arabia, which led efforts to cut back supplies. The Saudi energy minister warned last week that there would be no “free rides” for producers on the backs of OPEC’s supply curbs, even as U.S. shale producers increasingly appear positioned for a resurgence. 

But Sprott Asset Management portfolio manager Eric Nuttall expects prices will continue to rise gradually as storage levels are eventually drawn down.

“The market is too myopic in focusing on the United States,” Nuttall said.

The rise in storage levels last week was in large part due to higher U.S. oil imports, Nuttall said.

On Wednesday, data from the U.S. Energy Information Administration showed U.S. imports falling 745,000 barrels per day—a trend that Nuttall expects would help draw down inventories.

He said inventory levels in other OECD levels around the world are also falling.

“You need to take a more holistic approach since there are many other storage areas than just the U.S.,” he said, adding that he maintains his view that prices will enter into the US$60 levels by year-end.

Analysts at Citi Group also expect U.S. storage levels to fall as refineries under maintenance are brought back online. It estimates that the amount of U.S. refinery capacity under maintenance will fall to 0.4 million bpd, down from 1.5 million bpd today.

The bank expects OPEC to extend its production quotas when it holds meetings in May.

“The Saudis must play a balancing act this year, needing to keep the oil price up through 2017, after which they may well need to lay out a path of rapid production growth,” Citi analysts said in a recent research note.

The Kingdom is said to be fixated on seeing oil prices rise as it pursues an initial public offering of its state-run oil giant Saudi Aramco in 2018.

“The oil markets are always noisy, but it looks like the Saudis are sending a clear signal that the Kingdom will defend prices over market share for the remainder of this year.”

Investors do not yet appear convinced, particularly as OPEC shows signs of raising production.

Data released by the International Energy Agency on Wednesday shows OPEC crude output grew by 170,000 barrels per day in February, to a total of 32 million bpd.

The February increase put the cartel at 91 per cent compliance on its supply quotas, compared to 105 per cent one month earlier.

In February the Saudis increased production by 180,000 bpd, though the country still remains well below its target production levels. Saudi Arabia itself said that it had boosted production by 263,000 bpd in February, according to an OPEC report released Monday.

Matthew Reed, an analyst with Foreign Reports based in Washington, said it is too early to judge the depth of OPEC supply cuts after just two months of data. The production quotas came into effect January 1.

Reed said there are, however, lingering doubts over whether Iraq will ultimately meet its quotas.

The country recently signalled that it was focused solely on cutting back its oil export levels rather than production, which directly contradicted OPEC’s output quotas.

“Iraq is really the big sticking point right now,” Reed said. “The question in my mind is whether Iraq is going to meet its commitments when it is the no. 2 producer in OPEC and needs to act like it.”

jsnyder@postmedia.com