Crude prices rose on Tuesday as Asian stock markets stabilized following heavy losses in the previous session, but weak oil market fundamentals with production levels persistently above global demand kept a lid on gains.
Benchmark futures surged as much as 4 percent on Monday to three-week highs as relations between Saudi Arabia and Iran soured following Riyadh's execution of a prominent Shi'ite Muslim cleric. But the rally fizzled and oil prices ended down after weak Asian and U.S. manufacturing data indicated a gloomy demand outlook.
By 0428 GMT on Tuesday (11.22 p.m. ET on Monday), Brent crude LCOc1 was up 25 cents at $37.47 a barrel, while U.S. West Texas Intermediate (WTI) crude futures CLc1 were up 23 cents at $36.99 per barrel, both more than a dollar less than highs reached in the prior session.
Traders said the gains were driven by a slight increase in Chinese shares that offered hope that Monday's 7 percent plunge in equities was a flash in the pan.
None of this, however, changes the fact that the underlying supply-demand fundamentals remain weak, dominated by an unwillingness of producers to cut output that has led to a surplus of hundreds of thousands of barrels of crude every day.
In fact, ANZ said the tensions between Saudi Arabia and Iran "will further aggravate the oversupply situation in 2016".
It will "reduce the likelihood of any collaboration between the two oil majors regarding oil output as Iran re-enters the international market once sanctions are lifted", the bank said.
According to a Reuters poll, Brent and WTI, currently trading two-thirds below their mid-2014 highs, are likely to average around $50 this year as subdued demand growth looks unable to absorb rising supply.
In the United States, inventories are already near record levels. Traders said market intelligence firm Genscape reported a build of over 480,000 barrels in U.S. Cushing crude stocks for the week to Jan. 1. [L1N14K05D] [L1N14J011]
Overall U.S. commercial crude stocks probably dipped last week, while distillate and gasoline stocks likely edged higher, a Reuters survey showed. [EIA/S]
Industry group American Petroleum Institute will release storage data at 4:30 p.m. ET.
With brimming U.S. inventories and tensions in the Middle East, a recent move by WTI crude into a premium over Brent CL-LCO1=R has been eliminated since the new year, but analysts expect it to return soon.
"As U.S. crude oil is starting to be exported, we would think that the further widening of spreads into positive region (of WTI over Brent) will come in the coming weeks," brokerage Phillip Futures said.
Congress lifted a four-decade old ban on U.S. crude exports in December and several companies have already announced they will export cargoes.-Asfar