Canada's oil producers are being told to brace for more bad news, even as they struggle to cope with a collapse that has driven prices down by nearly 60 per cent from their peak last June.

With global production continuing to exceed demand, crude prices are set to head lower and West Texas Intermediate should average just $41 (U.S.) a barrel in the first half of this year, Toronto-Dominion Bank economist Dina Ignjatovic said in a report Friday. She expects WTI prices to sink below $40 as bulging inventories weigh on the market in the next few months.

"Oil prices are likely to remain subdued through the first half of the year, and follow more of a U-shaped recovery pattern than the V-shaped pattern that typically follows such sharp price declines," she wrote. The TD economist expects the U.S. benchmark to average just $53 in the second half of the year, and $65 next year.

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Crude prices fell another 70 cents Friday to $45.60 and lost more than $3 on the week amid further evidence that global crude stocks are growing rapidly. The United States Energy Information Administration reported this week that inventories are at an 80-year high for this time of year.

The TD forecast is one of the more pessimistic among oil economists. FirstEnergy Capital's Martin King told a Calgary audience this week that he expects WTI to average $54.50 this year, but that, in the short term, they are likely to fall further.

Calgary-based oil producers are slashing their capital spending plans and laying off staff, even as the Alberta and federal governments cope with major reductions in revenues. Companies may have to make more cuts, given the gloomy predictions of further price declines as traders await signs that the announced measures are having an impact on supply.

In her report, Ms. Ignjatovic said she doesn't see the supply-demand picture coming into balance until late 2016, meaning inventories will continue to build and keep downward pressure on prices.

"Given that the U.S. is now not only among the top producers, but is accounting for the lion's share of global production growth, markets – and OPEC – will be particularly focused on how the U.S. oil industry responds to lower prices," she said.

Producers in the U.S. have reduced the number of drilling rigs operating by more than 15 per cent, but it will take several months for those cuts to halt production growth, especially since companies are focusing now on the most prolific areas. A reduction in the number of drilling rigs may not translate directly into lower production.

Growing inventories will depress prices even after demand has caught up to supply, said Amrita Sen, oil economist at London-based Energy Aspects LLC. She said North American producers are finding it increasingly difficult to compete with heavily-discounted offshore imports on the Canadian and U.S. east coasts – and that is forcing more American crude into storage.

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In the short term, prices will likely fall further, perhaps as low as $35 a barrel, Ms. Sen said on Friday. But she sees a stronger rebound than TD does and is forecasting prices of $60 to $70 a barrel in the second half of the year.