Oil prices hit new 2016 highs despite lingering excess

Brent crude reached fresh 2016 highs on Friday and was poised for its biggest monthly gain in seven years as a weak dollar and falling US production tempered concerns about a lingering excess of physical oil.

A looming rise in Middle East output capped gains, but investor sentiment held the optimism that has helped lift oil futures nearly 80 per cent higher than January lows.

Brent futures were trading at $48.35 a barrel at 0949 GMT, up 21 cents from their last close. US crude was up 45 cents at $46.48 a barrel, with both contracts hitting 2016 highs.

Investment bank Jeffries on Friday said the market "is coming into better balance" and would flip into undersupply in the second half of the year.

But others warned that the rally was too soon, and driven in large part by investors taking speculative positions on oil.

"The issue is that we haven't seen price rallies ... correlate with fundamentals," said Hamza Khan, senior commodity strategist at ING. "The fundamentals - high stocks, high production - haven't changed."

Deutsche Bank said a looming rise in production by the Organization of the Petroleum Exporting Countries - due to climbing Iranian output and following outages in Iraq, Nigeria and the UAE - could cap recent price rises.

Additionally, Saudi output is expected to edge up by 350,000 barrels to around 10.5 million barrels per day, sources told Reuters, just as tankers filled with unsold oil are at sea seeking buyers.

Still, falling production outside OPEC, notably in the United States, has raised hopes that the worst of the nearly two-year excess of oil was over.

Bank of America Merrill Lynch said in a note that "non-OPEC oil supply is indeed hanging off a cliff", and estimated that global output would contract on the year in April or May for the first time since 2013.

A weakening dollar, which has fallen 6 per cent this year against a basket of other leading currencies, helped support oil, as it makes dollar-priced crude cheaper for holders of other currencies.

There are also growing risks that production in OPEC member Venezuela could decline. Risk consultancy Eurasia Group said the state was running out of cash to keep its oil pumps running.

"Mounting problems will probably lead to a decline of 100,000-150,000 bpd this year," Eurasia Group said.