Oil prices edge up on short covering, but oversupply still bites

Diesel futures, which are used as a proxy for heating-oil prices, usually rise in wintry weather, but mild temperatures have kept indoor-heating demand subdued so far this fall.

Options on USA crude expire later on Tuesday, with open interest mostly gathered around put options, which give the seller the right, but not the obligation, to sell US futures at both $40 and $45 a barrel.

The U.S. Energy Information Administration will release its weekly report on oil supplies at 10:30AM ET Wednesday.

USA crude stockpiles climbed to 487.3 million barrels last week, the highest for this time of year since 1930, government data show.

If the US benchmark falls through the psychologically key $40-a-barrel level, prices could fall to new multiyear lows in the mid-$30s, a few analysts say.

Front-month USA crude futures CLc1 broke back above $41 a barrel, trading at $41.08 a barrel at 0425 GMT, up 34 cents from their last close.

Oil dropped below $40 a barrel in NY for the first time since August as producers’ output swelled global inventories to a record. The price for Brent crude oil increased 1.6 percent to $44.27 in early Wednesday trading.

The earlier gains on WTI “are really an exercise to defend the US$40 handle, where we saw a 4.0 percent rebound after prices touched lows of US$40.06”, said Bernard Aw, market strategist at IG Markets in Singapore.

“So, oil prices continue to remain depressed by the still-high supply of the stuff and weaker demand prospects”, he said.

OPEC’s crude production averaged 31.38 million barrels per day, according to OPEC’s recent monthly oil market report.

“We think oil prices will average lower next year than this year and only recover very gradually”, said John Davies, head of commodities at BMI Research, a subsidiary of Fitch Rating.

The IEA said if the winter is mild, as now forecast, the stockpile of oil could force the price even lower in the coming months.

Recovery is seen in the oil market at the start of the new week in response to the increased geopolitical risks due to the terrorist attacks in Paris on Saturday.

“We may see a few upside in oil prices, but we are not going to see a big rally”, Daniel Ang, an analyst with Phillip Futures Ltd., told the Wall Street Journal Monday.

“Today, traders are realizing that fundamentally nothing has changed”, said Gain Capital analyst Fawad Razaqzada.