Oil futures fell on Thursday after announcement of a preliminary deal with Iran that could soon bring an end to sanctions on Iranian oil by Western powers.

That could add to the glut of oil worldwide which is playing havoc with oil prices.

On Thursday, West Texas Intermediate, the biggest North American crude contract, fell 63 cents to $49.47 US a barrel, after rising five per cent the previous day. Brent crude, traded in London, fell $1.93 to $55.17.

Western Canada Select, a Canadian oilsands contract, is closing up its gap with WTI, closing at $36.84 US today.

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 adding to worldwide oversupply of oil that has seen the price fall by more than 50 per cent in the last nine months.

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.

Reports from the U.S. and Canada show 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 Tuesday 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.

That has added volatility to oil prices which seemed to have stabilized just below $50 last month.

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 2016

"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.