Oil takes breather from losses but oversupply concerns remain

Oil edged higher on Tuesday after falling by up to 10 percent in just one week, but investors remained concerned about oversupply weighing on prices.

Global benchmark Brent crude was trading up 49 cents at $42.63 a barrel at 1031 GMT. U.S. West Texas Intermediate (WTI) crude was up 38 cents at $40.44 a barrel, after briefly dipping below $40.

"There is much talk about the product glut replacing the oil glut, and this is a worrisome indicator for crude demand," said Frank Klumpp, oil analyst at Stuttgart-based Landesbank Baden-Wuerttemberg.

Global fuel inventories are brimming as refineries have churned out huge volumes of diesel, gasoline and jet fuel but the supply glut has diminished profit margins and demand has been unable to keep up with supply.

Analysts said high crude and product production levels would continue to weigh on markets and that as a result, refiners were likely to reduce orders for new crude feedstocks, affecting demand for oil.

"Weaker crude throughput at refineries will lower crude demand," BMI Research said.

Financial oil traders have taken note of the glut, with speculators taking on large volumes of bets that would profit from lower prices, known as shorts.

"I see a strong build in shorts. They are starting to reach excessive levels," said Hans van Cleef, ABN AMRO senior energy economist.

U.S. commercial crude inventories are expected to show a weekly fall after last week`s unexpected rise in stocks broke a nine-week drawdown, according to a Reuters poll. 

Gasoline and distillate inventories are also expected to have fallen, the poll indicated.