U.S. crude remains below $40 as oversupply still weighs

By Henning Gloystein

SINGAPORE (Reuters) - Oil prices edged up in early trading on Wednesday, supported by a weaker dollar, but U.S. crude futures remained below $40 per barrel and Brent was below $42 as ongoing fuel oversupply and stuttering economic growth weighed on markets.

U.S. West Texas Intermediate (WTI) crude futures were trading at $39.77 per barrel at 0350 GMT, up 26 cents from their last settlement but still below the $40 marker they settled below for the first time since April in the previous session.

International Brent crude futures were trading around $42 per barrel.

Analysts said a weaker U.S. dollar, which has shed 2.5 percent in value against a basket of other leading currencies since July highs, was lending oil markets some support by making fuel imports cheaper for countries using other currencies, potentially stoking demand.

But they added oil prices would be under downward pressure in the near-term due to rising supplies, including from Libya, high crude and refined product inventories, as well as an uncertain demand outlook.

"In the last 72 hours, there have been reports of successful negotiations to re-open blockaded oil terminals in Eastern Libya and U.S. airstrikes against Daesh (ISIS) in Sirte. These increase the chances of a production ramp near-term, from 300,000 barrels per day (bpd) to 600,000 bpd," Morgan Stanley said on Wednesday, although it added that "longer-term (production) growth still looks challenging."

"Risks for oil remain skewed to the downside in 2H16. Supply disruptions and risk appetite were supportive April-June, but fundamental headwinds are growing, which outnumber any recent positives," Morgan Stanley said in a separate market outlook to clients.

The U.S. bank said the global economic outlook was also weak, potentially hitting fuel demand. "We expect global growth to move below consensus estimates," Morgan Stanley said.

Oil markets have been dogged by oversupply that started in the crude sector more than two years ago and which has since spread to refined products, leaving storage tanks filled to the brink, and unsold fuel stored on ships.

However, other analysts said recent price falls were overblown, with Citi saying bears, who speculate on falling prices, having "gone wild in oil at $40."

Standard Chartered bank said there was "no fundamental justification for recent oil price falls" and that "the global oil market has rebalanced, and U.S. crude supply and inventories are expected to fall."

(Reporting by Henning Gloystein; Editing by Richard Pullin and Subhranshu Sahu)