Market and product

Oil prices gained further traction in early Asian trade Tuesday, buoyed by the ongoing supply outages and bullish outlook that the global market has flipped into a deficit.

However, analysts expect profit-taking and lack of confidence in the rally will likely hinder prices from climbing higher.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in June CLM6, +0.29% traded at $48.18, up $0.47, or 1%, in the Globex electronic session. July Brent crude LCON6, -0.18% on London’s ICE Futures exchange rose $0.26, or 0.5%, to $49.30 a barrel.

Global oil production has outstripped demand for nearly two years, causing prices to drop as low as $26 a barrel earlier this year. However, production disruptions in Canada, Nigeria and Libya has helped chip away some of the glut, prompting a rosier outlook.

“The increasing intensity in supply-side disruptions in the oil market should see prices well supported in the short term,” said ANZ Research.

While prices have risen 85% since dropping to its 13-year low in February, the lingering low prices have also made it uneconomical for many upstream producers to keeping pumping, sending U.S. shale production on a steady decline in recent months. In the week ended May 6, U.S. crude production fell to 8.8 million barrels a day, lowest level since September 2014.

Elsewhere, production of crude has also dropped. In April, China’s crude production dipped 5.6% to 16.6 million tons or 4.05 million barrels a day.

“The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected,” said Goldman Sachs in a report Monday, adding that the global oil market likely shifted into a deficit in May. The bullish comments pushed WTI crude to its highest settlement since early November on Monday.

However, the bank also warned of headwinds. The return of some of the production outages and higher-than-previously expected U.S., North Sea, Iraq and Iran production could more than offset the persistence of some of the disruptions.

“As a result, while we still forecast a deficit in second half of 2016, it is now smaller than we had expected at 400,000 barrels a day versus 900,000 barrels a day previously. This also leads us to expect that the global market imbalance will shift back into surplus in first half of 2017,” said the bank.

Although prices are making their way up toward the $50-a-barrel mark, some analysts said the rally might be short-lived.

“The $50 mark is more of a psychological barrier. The truth is, there is still plenty of oil in the market and the glut is still there,” said Avtar Sandhu, chief commodity analyst at Phillip Futures.

“What investors need is a more sustained and stabilized rally. Profit-taking could take prices back down to the $45 level,” said Sandhu.

For this week, investors will be eyeing the weekly U.S. crude stocks and production for cues. In an analysts survey by Platts, U.S. crude stocks likely decreased 3 million barrels last week. Official data by the U.S. Energy Department will be released on Wednesday.

Nymex reformulated gasoline blendstock for June RBM6, -0.21% — the benchmark gasoline contract — $0.01 to $1.6153 a gallon, while June diesel traded at $1.4496, 95 points higher.