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Oil prices rise but jury still out on whether recovery will last

Published: 16:20 29 Apr 2016 BST

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Oil prices were on their way back up again on Friday, but opinion was mixed as to whether the recovery will last.

The price of a barrel of Brent crude was up by a modest 0.1% to US$48.2 while US West Texas Intermediate gained almost 1% to US$46.5.

Prices have bounced back from below US$30 a barrel on hopes that the market will rebalance later this year, as well as more bullish sentiment towards riskier assets generally.

Capital Economics said better economic data out of China has supported the prices of most energy commodities, while a slightly weaker US dollar has also helped.

The research group's Thomas Pugh and Simon MacAdam said in a note that continued strong US employment in the US should support gasoline demand there.

"Rapid growth in gasoline demand in the US, as well as in China and India, is a key reason why we expect the oil market to rebalance by early next year," they said.

But rating agency Standard & Poor's was more bearish, saying in a report that hydrocarbon prices will most likely remain low throughout 2016.

S&P said that would leave US oil and gas exploration and production companies facing ongoing cash flow deficits and budget gaps.

And it said the well is running dry in terms of debt funding and the potential for cost cuts, forcing companies to sell assets or tap shareholders for cash.

S&P credit analyst Aaron McLean said S&P believed hydrocarbon prices would remain low, cutting into revenues even more.

"As balance sheets deteriorate, debt-funding sources will continue to tighten, causing E&P companies to look elsewhere to fund cash flow deficits as further spending cuts may prove to be unrealistic," he said.

"Along with severely curbed access to debt markets, we expect financial institutions will rein in availability on revolving credit facilities this year.

"Those conditions will likely cause many E&P companies, particularly those in the speculative-grade category, to consider divesting assets or, in select cases, tapping the equity market for critical cash to fund capital budgets that have already been slashed to the bone."

McLean added that the industry was also likely to reach the tipping point this year as deep cuts in capital spending accelerate production declines, further weakening revenue.

"Traditional and selective defaults, and subsequent negative rating and outlook actions are likely to continue for the rest of 2016," he said.

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