04/02/2015 03:30 EDT | Updated 06/02/2015 05:59 EDT

Oil Headed To $40 A Barrel In Spring, TD Predicts

Oil is likely to fall to the $40 a barrel mark in the second quarter of 2015 before recovering in 2016, according to a new report from TD Economics.

The report predicting more pain in the oil sector comes as contradictory reports about oil supply play havoc with oil markets.

The prospect of a deal with Iran to limit Tehran's nuclear program creates the prospect of more OPEC oil on the market. The country would be able to export an extra 500,000 barrels a day if it is able to reach a deal acceptable to the U.S. and other world powers.

Reports from the U.S. and Canada shows the amount of oil produced in North America continues to rise, even as storage depots near the limits of what they can hold.

A Statistics Canada report released Wednesday showed Canadian production of oil and gas rose 2.6 per cent in January, despite declining prices.

Oil price gyrates

Contradicting the trends pushing oil lower are reports that U.S. refiners have increased their demand for oil as U.S. drivers step on the gas, starting driving season early.

The U.S. Energy Administration's data released yesterday showed a decline in crude production as wells are taken offline in response to low prices.

On Thursday, West Texas Intermediate, the biggest North American crude contract, fell $1.14 to $48.95 US a barrel, after rising five per cent the previous day. Brent crude, traded in London, fell $2.34 to $54.77.

Western Canada Select, a Canadian oilsands contract, is closing up its gap with WTI, priced at $36.83 US today.

Oil is down Thursday mainly because of the prospect of a deal with Iran, traders said.

Patricia Mohr, a commodity market specialist at Scotiabank points to improved production in the U.S. despite the decline in the number of rigs.

No recovery until 2015

 "Increased rig productivity, with output from new wells up at least 20 per cent better and faster drilling times, combined with a shift to more prolific areas and fewer vertical wells, have offset the drop in active rigs," she said in a report on commodities.

Mohr predicts oil won't recover until the second half of the year and then only to the $65 level.

"Despite market skepticism, we believe U.S. shale oil production is on the cusp of levelling out in the second quarter of 2015," she said.

TD economists Dina Ignjatovic predicts more weakness in store for oil in the second quarter, as storage depots fill up pushing oil down to $40 a barrel.

That could hurt Canada's growth prospects and revenue for both provincial and federal coffers. 

But there should be a gradual recovering in the second half of the year, she said, with WTI moving toward $65 a barrel in 2015.

There is continued weakness in most commodity sectors because of poor demand from China, with copper, base metals and lumber prices down, Ignjatovic said. The high U.S. dollar is contributing to a decline, as most commodities are priced in U.S. dollars, making them increasingly expensive as the dollar climbs.

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