London: Oil struggled to rise more than a dollar to above $71 a barrel on Tuesday, recovering from a five-month low the previous session, but high inventory levels and the strength of the dollar were expected to limit gains.
US crude for June delivery rose $1.58 to $71.66 at 3:39pm, after settling down $1.53 at a five-month low of $70.08 a day earlier.
London Brent crude for July rose $1.29 to $76.39 a barrel.
The trends remain uncertain because of persistent investor concerns over the euro and swollen US oil inventories, with the euro again buffeted in volatile trade near a four-year low touched on Monday.
June crude has fallen 20.5% from its 19-month high $87.15 hit on 3 May, which could indicate that crude prices may be in for a short-term bounce, technical analysts said.
“Crude oil has made a big, big correction and there will be some attempts at finding a bottom around $70,” said independent oil analyst Olivier Jakob at Petromatrix.
“We are getting closer to the fair value for crude oil, but the problem remains the high contango level.”
US crude futures for July are around $3 more per barrel than June front-month futures, with the June contract set to expire on Thursday.
Crude stockpiles at the delivery hub for the US contract’s West Texas Intermediate benchmark crude have risen in the last eight weeks to a record 37 million barrels, pushing front-month US crude down relative to later futures contracts and Brent.
“When stocks come close to capacity, traders try to get rid of front month contracts because of difficulties taking delivery of oil when no storage is available,” said Global Oil Analyst Christophe Barret at Credit Agricole CIB in London.
US crude stockpiles likely rose last week as imports rebounded and refinery utilisation held flat, a preliminary Reuters poll of analysts showed on Monday. Storage capacity at the Cushing, Oklahoma hub is thought to be around 41 million barrels.
Ahead of weekly inventory data from industry group American Petroleum Institute (API) on Tuesday and the US government Energy Information Administration (EIA) on Wednesday, crude inventories rose 700,000 barrels on average last week.
The euro stayed on the back foot on Tuesday, slipping versus the dollar near a four-year low as a meaty combo of euro zone debt crisis and growth-crimping austerity steps set investors to worrying that regional growth could be hurt.
But analysts said tightening European credit default swaps, the market mechanism used to transfer credit exposure to fixed income assets between parties, had helped to improve the correlation between oil prices and the EUR/USD rate.
“When CDS spreads blew out in the Eurozone, bond markets were rattled and concern grew on the EUR as a reserve currency - at the time, the EUR/USD rate was a poor guide to the direction of the oil price,” said Harry Tchilinguirian, senior commodity analyst at BNP-Paribas.
Euro zone finance ministers are ironing out a €750 billion euro ($925 billion) plan hatched a week ago to calm markets and stem fears of repeated Greek-style debt crises in the currency area.
“The European CDS spreads have come in a little with the latest package, and the correlation of oil to EUR/USD has improved,” Tchilinguirian said.