Oil Prices Regain Ground, but Glut Looms

Brent, WTI on track for strongest March rally in years; OPEC's March production up despite freeze proposal.

Oil futures rebounded from early losses on Thursday but the recovery was muted as the market's focus switched back to signs of growing oil stocks.

Brent crude had gained ground by midday, on track for its strongest March since at least 2007. U.S. crude earlier in the day fell to a more than two-week low, but it was set for its biggest March rally in 14 years.

Brent crude futures were trading 45 cents higher at $39.71 a barrel at 1130 GMT.

The front-month contract for U.S. crude futures was flat at $38.32 a barrel, after dropping to $37.57, the lowest since March 16.

Still, high global stocks put the sustainability of the gains in question -- data on Wednesday showed that U.S. crude stocks reached yet another record high last week despite an 11-year high in seasonal refinery utilisation.

"The door is open for lower prices," said Hamza Khan, head of commodity strategy with ING. "There's a backlog of oversupply that needs to be worked out of the system."

U.S. crude stockpiles rose by 2.3 million barrels to 534.8 million barrels in the week to March 25, the seventh week at record highs, data from the U.S. government's Energy Information Administration showed.

Crude prices have risen about 50 percent since mid-February on optimism over a proposal by several major oil-exporting countries to freeze production and signs of falling U.S. output.

Oil analysts in a Reuters poll also raised their average price forecasts for 2016 for the first time in 10 months, but also cautioned the rally could fade near term.

In the past week, oil prices had started to track lower.

OPEC crude output rose in March to 32.47 million bpd from 32.37 million bpd in February, according to a Reuters survey, while Iran is expected to add another half a million bpd of oil within a year.

Elsewhere in Asia, the sustained weakness in oil prices has suppressed upstream oil and gas production, consultancy BMI Research said. It said in a report weaker prices are "limiting opportunities to stem natural declines in ageing assets."

But the recent rally has allowed U.S. producers to hedge their production at higher prices, which could keep more of them from shutting down.

"It's hard to see how we could sustain this rally," said Harry Tchilinguirian, global head of commodity market strategy with BNP Paribas, adding that the price rise "contained the seeds of its own demise."