LONDON (Reuters) - Oil prices stabilised on Tuesday after a sharp sell-off as a fall in the dollar triggered a bout of short-covering, but analysts said the market remained vulnerable to further falls.
Rising oil prices through December encouraged investors to buy large volumes of crude oil futures contracts and many of these "long" positions are likely to be unwound unless the market stays strong, analysts and brokers say.
"I see this as a dead cat bounce," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen. "Oil is unlikely to recover until the longs have been reduced."
Tamas Varga, analyst at London broker PVM, agreed:
"We are seeing some short covering on the back of a weaker dollar," Varga said. "We might see stronger prices today after yesterday's big fall, but the market should weaken in coming days. I believe we are going lower."
Oil is priced in dollars, so a weaker dollar tends to encourage buying by consumers holding other currencies.
Brent crude was up 20 cents a barrel at $55.14 by 0950 GMT. U.S. light crude oil was up 25 cents at $52.21.
Both crude contracts fell more than $2 a barrel, or around 4 percent, on Monday on doubts that the Organization of the Petroleum Exporting Countries (OPEC) and other key oil producers would cut output as promised to try to reduce a global oversupply.
OPEC members Saudi Arabia and Abu Dhabi both appear to be reducing production but it is not clear whether other big producers such as Iraq will follow suit.
Supplies are also increasing in North America.
The average Canadian rig count for December 2016 was 209, up 36 from the 173 counted in November 2016, and up 49 from the 160 counted in December 2015, said Matt Stanley, a fuel broker at Freight Services International in Dubai.
"A 30 percent increase in Canadian rigs in a year ... The bear in me is well and truly back," Stanley said.
In the United States, energy companies last week added rigs for a 10th week in a row, extending the drilling recovery into an eighth month as crude prices remained at levels at which many U.S. drillers can operate profitably.
Adding one-off supplies, the U.S. Department of Energy on Monday announced a sale for crude from its Strategic Petroleum Reserve (SPR), with bids for 8 million barrels of light, sweet oil due by Jan. 17.
"U.S. SPR sales add to bearish pressures on U.S. crude," Citi said following the release of the bids.
(Additional reporting by Henning Gloystein in Singapore; Editing by Louise Heavens)