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Thursday, February 19, 2015

Oil Rally Seen Reversing as Rising U.S. Supply Deepens Glut

(Bloomberg) -- The rebound in oil will reverse because rising U.S. production is deepening the global supply glut, according to UBS AG, Bank of America Corp. and Commerzbank AG.

Brent futures entered a bull market this month as U.S. drillers stopped using a record number of rigs, companies cut at least $40 billion from spending plans and hedge funds turned the most bullish in seven months. None of that will stop Brent slipping back to $45 a barrel or lower within the next three months, from about $61 now, the banks’ analysts say. Prices fell as low as $45.19 on Jan. 13.

The highest U.S. oil production in three decades won’t be curtailed by the idling of rigs and inventories will keep expanding, according to UBS. The rally has been based on sentiment rather than the fundamentals of supply and demand, Commerzbank says. As storage space fills up, producers will need to discount to sell barrels, Bank of America predicts.

“Oil prices should again come under pressure,” said Giovanni Staunovo, an analyst at UBS in Zurich who expects Brent to reach $40 in the next three months. “Production is likely to rise further and inventories will continue to rise. This means the market will remain oversupplied in the first half of 2015.”

Brent’s advance to a two-month high of $62.57 on Monday prompted some members of the Organization of Petroleum Exporting Countries to signal confidence in a recovery. Qatar’s Energy Minister Mohammed bin Saleh Al Sada said that “a sense of optimism” has returned, while Kuwaiti minister Ali Al-Omair said the supply glut is smaller than previously estimated.

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