Crude oil prices continue to inch up supported by increased investor interest in the commodity amid reports of a slowdown in US oil production, however, analysts warn that weak fundamentals for oil remain intact.
"We believe the optimism among investors vis-à-vis oil is exaggerated. This has given rise to considerable correction potential which could lead to a sharp fall in prices at any time," said a note from Commerzbank Corporates & Markets.
Brent crude oil traded close to $59 per barrel on Monday, as many investors increase their bets on higher prices, with their net long positions hitting highest level since August 2014.
"Speculative market participants appear to be calling for a bottom in oil prices," ANZ said in a note, to moneycontrol.com.
Oil prices fell sharply last week following a preliminary agreement between Iran and six world powers on Tehran's nuclear programme, which initially raised concerns over Iranian oil exports flooding the oversupplied market. However, oil prices later rebounded on the expectations that oil exports from Iran will be delayed.
"Even if a final deal is reached, Iran is unlikely to be able to significantly ramp up its exports until 2016 at the earliest," said Capital Economics in a note.
Though the oil exports from Iran will not start flowing into the global markets immediately, the supply from the country could add 1 million barrels per day to the already over-supplied market once the sanctions are eased.
Oil prices found further support from a cut back in the US oil production. Oil services firm Baker Hughes reported that the number of US oil rigs were down 40 to 988 for the week ending April 10.
"The decline in US oil production announced in that reporting week evidently prompted many investors to close their short positions, for three-quarters of the increase in net long positions can be attributed to short covering," said Commerzbank.
However, many analysts warn that investors should not be misled by the current rally in oil prices, saying that fundamentals for the commodity are still on the weak side.
"Although there are tentative signs of demand improving and rig counts fell to the lowest level since 2010, an ongoing global market surplus – driven by swelling US inventories (the biggest weekly jump since March 2001) and Saudi Arabian output to record high levels – should limit any potential rally," ANZ said.