New York: After US crude slipping below $40 per barrel on Monday, oil prices on Tuesday edged up thanks to short covering by hedge funds. However, traders are cautious as the markets are reeling under pressure in the wake of excess production.

US West Texas Intermediate (WTI) crude was trading at $40.21 a barrel. This was marginally higher by 15 cents from its last close after dipping below $40 on Monday for the first time since April.

International Brent crude oil futures were trading at $42.33 per barrel, up 19 cents from their last close.

Despite the slightly higher prices on Tuesday, oil market data implies bearish market conditions.

Industry data shows that the global oil rig count for new production edged up in June for the first time this year, rising by two to 1,407, largely thanks to an uptick in U.S. drilling.

Actual production in the United States is also up slightly, according to government data, and it’s also rising in OPEC-member Iraq.

Market analysts attribute the marginal recovery in oil prices to hedge funds taking on large volumes of bets that would profit from lower prices. The short covering by hedge funds helped prices move marginally higher.

Short covering pushed crude oil price marginally up. Biggest volumes on short side were recorded as speculators have also increased their shorts for WTI crude. This is dragging the net long position in WTI to its lowest since February, according to US-based ClipperData.

Biggest volumes on short side recorded as speculators have also increased their shorts for WTI crude. This is dragging the net long position in WTI to its lowest since February, according toUS-based ClipperData.

Another bearish development was witnessed in gasoline. Speculative positions in gasoline have moved to a record net short position as hedge funds bet on an ongoing gasoline supply glut.

High production levels in crude and the refining sector would continue to weigh on markets after contributing to a 20 percent price fall since June. This is forcing refiners to reduce orders for new crude feedstocks.

As a result, margins come under pressure as the refinery run cuts are a result of low sector profits. Singapore’s fuel refinery margins are at $3.53 per barrel. This is about one-third of January high.

Analysts forecast that the market will tighten in 2017 and 2018 to come as it brings supply and demand more in balance.

With oil demand growth still strong despite slowing economic growth, drilling activity for future production also points to a tighter future market as industry data shows that global drilling for new crude remains at levels that have not been seen since the late 1990s.