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[LONDON] Rallying oil prices are masking a persisting surplus that will thwart further gains, according to Barclays Plc, Societe Generale SA and Morgan Stanley.
Unsold exports from West Africa, Azerbaijan and the North Sea are piling up, resembling conditions last summer when oil began a 60 per cent plunge, Barclays and Morgan Stanley said. Slowing US crude output is drawing attention from rising global inventories and prices are likely to slip before the end of the quarter, Societe Generale predicted.
Oil has rebounded more than 40 per cent in London from a six-year low reached in January, as the surge in US shale production that triggered a global glut tails off. Barclays and Societe Generale predict prices are still vulnerable to a downward correction because recovering fuel demand hasn't yet whittled away that surplus.
"Further upward momentum in Brent prices is likely to fade," Miswin Mahesh, an analyst at Barclays in London, said in a report. "Key physical crude oil market indicators in the Atlantic Basin are showing signs of weakness at present, highlighting the disconnect between the futures and physical markets."
About 80 million barrels of Nigerian and Angolan crude remained unsold in the first week of May, Barclays estimated. That's equivalent to about three weeks of combined production from those countries, according to data compiled by Bloomberg.
Exchange for Physical contracts that allow traders to convert futures into cargoes were at a discount of 55 cents a barrel on Monday, according to data from London-based brokers PVM Oil Associates Ltd. They widened by 13 per cent last week, illustrating a growing divergence between futures markets and physical supplies.
"We are not bullish near term," Adam Longson, an analyst at Morgan Stanley in New York, said in a report. "In contrast to the first quarter of 2015, physical markets are eroding. We have growing concerns about crude fundamentals in the second half of 2015 and 2016."
Slowing US crude production is causing traders and investors to overlook the likelihood that global oil inventories will continue to accumulate in the second half, according to Societe Generale. The US rig count declined by 11 to 668, extending a slide that started in December, according to Baker Hughes Inc.
While "the window for a correction will be closing soon, there are still some reasons for caution" on prices, Mike Wittner, Societe Generale's New York-based head of oil market research, said in a report.
West African crude price differentials to Brent have been under pressure for the last couple of months because of the unsold cargoes, Michael Dei-Michei an analyst at research firm JBC Energy GmbH in Vienna, said by phone on Monday.
An estimated 20 to 30 million barrels of crude have gone into floating storage in the past several weeks, Dei-Michei said, citing reports and JBC's own ship tracking. US crude in land-based storage fell 0.1 per cent to 487 million barrels from the previous week, according to a Department of Energy report issued on Friday.
"The unsold cargoes together with the floating storage are evidence that even though US crude stocks did decline last week the rest of the world is not balanced yet," Mr Dei-Michei said. Instead of the US storing the glut "it's been now more distributed around the globe."