Oil prices slip towards $72 a barrel after market rally

Brent crude slipped towards $72 a barrel, giving up some of the gains seen on Monday when the market rallied for the first time in six sessions.

Oil has plunged close to 40 per cent in the past five months in its longest string of monthly losses since the 2008 crisis, as supply growth led by the U.S. shale

oil boom exceeded demand.

A decision by Opec to maintain output has also pummelled prices. Analysts said that the market was going through a volatile adjustment phase that would lead to more erratic price movements before a more stable pricing environment is found.

"Prices remain volatile as the market adjusts after last week's 10-per cent drop. We saw a huge recovery yesterday (but) this increase is likely to be short-lived as we see this as a consolidation of prices," Singapore-based trading house Phillip Capital said. "We also expect prices to overreact to any news in coming weeks with more volatility to come."

Brent crude had dipped 34 cents to $72.20 a barrel earlier, after a 3.4-per cent gain on Monday. U.S. crude fell 44 cents to $68.56 a barrel. "Saudi Arabia and OPEC no longer have the mechanism to balance markets from the supply side," said Mark Keenan, head of commodities research Asia at Societe Generale. The bank cut its US crude and Brent forecasts to an average of $65 and $70, respectively, for 2015 and 2016.

Both contracts touched five-year lows on Monday, with Brent hitting $67.53 and WTI touching $63.72, before settling up. “Yesterday much of the move higher right across the entire commodity complex ... suggests that there was a strong element of people increasing their allocation to commodities, taking advantage of these low prices,” Mr Keenan said, adding that investor portfolio adjustments are usually done at the start of the month.

As crude prices tumble, offshore drillers are increasingly considering “warm stacking” their rigs to take them temporarily off the market, and they also threaten unconventional producers that have recently come to the market when prices were still higher. New data suggests that a much-anticipated slowdown in the US shale rig count has started arriving.

Reuters