Brent Breaks $40/bbl, But Glut Warnings Persist

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Analysts think an improved attitude towards risk assets overall is the real reason for the oil rally. Equador has joined the ranks of oil producers vowing to correct the calamitous global market, and analysts are citing this as a contributing factor to Brent closing at $41.04 on Monday, a 2016 peak and 51 percent above the January 20 12-year low of $27.10.

U.S. West Texas Intermediate futures also climbed, by 4 percent, to $37.90 per barrel. Oil's rally began last month shortly after Russia and members of the Organization of the Petroleum Exporting Countries (OPEC) announced it would freeze their output in a bid to stop the global oil price slide; Brent's 5 percent gain on Monday comes after Guillaume Long, foreign minister to Ecuador, said his government will host a meeting this week in Quito with Venezuela, Colombia, and Mexico "to reach consensus over oil, especially prices.

"Monday's gains also follow rumours that OPEC producers are considering a new oil price equilibrium of around $50, according to New York-based consultancy PIRA.

Kokou Agbo-Bloua, global head of flow strategy and solutions at Societe Generale, believes $50 will be the target achieved later in 2016 and told CNBC: "There is clearly room for the stabilization of the oil price at these levels and some marginal upside towards the end of the year.

"Phil Flynn, analyst at Price Futures Group in Chicago, said all this activity is "feeding bullish sentiment into a market that's turned 180 degrees from where it stood just weeks ago.

"However, other analysts think an improved attitude towards risk assets in general is the real reason for the oil rally; Elizabeth Volynsky, oil analyst at Morgan Stanley, warns that "Oil fundamentals remain challenging.

"Prices can continue to rally on headlines and a U.S. dollar pullback, but the upside should be limited by bloated global inventories and producer hedging.

Volynsky added that "we worry that this latest oil bounce shares many features of the oil rally in the second quarter of 2015, which ultimately resulted in disappointment."

Other observers have expressed their skepticism about the efficacy of production freeze talks, with Phillip Futures recently stating that "We continue to believe that if prices were to be artificially supported with production cuts it would only give more expensive forms of production more room to breathe and would only solve the problem in the short term."

Source: Ship & Bunker News Team

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