Oil breaks $40 as bets on rising prices hit record highs

Celebrating rally too soon: Pro

Oil prices surged to three-month highs on Monday, as improving sentiment in financial markets helped support prices and data revealed investors have dramatically upped their bets on the price of oil rising.

Front-month Brent crude futures traded as high as $40.26, up close to 4 percent and trading at its highest level since early December on Monday in afternoon trade.

U.S. West Texas Intermediate (WTI) futures were up around 4 percent at $37.35 a barrel.

Genscape said Cushing stockpiles rose by 670,714 barrels to reach 68.8 million last week according to Reuters. In the previous week to Feb. 26, Genscape reported that inventories at the hub rose by more than 1 million barrels.

Meanwhile, data from the InterContinental Exchange (ICE) published on Monday showed that hedge fund and money managers have hiked their long positions, or bets, on the price of oil rising to record highs.

Shamil Zhumatov | Reuters

Investors have increased their net long positions in internationally traded Brent crude from 22,171 lots to 342,460 in the week to March 1, which is the highest level on record, since ICE began collecting data in 2011. Oil prices are now up over 40 percent on their lows for the year, as prices slumped to levels not seen since 2003 in January.

Global head of flow strategy and solutions at Societe Generale, Kokou Agbo-Bloua said he expects oil prices to stabilize, with a $50 target by the end of the year.

"There is clearly room for the stabilization of the oil price at these levels and some marginal upside towards the end of the year," he told CNBC. But most analysts remain distinctly cautious on the outlook from here, despite the recent rally.

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Oil analyst at Morgan Stanley, Elizabeth Volynsky, said improved sentiment towards risk assets, rather than fundamentals, was the real reason for the support seen in oil prices and supply and demand concerns have not changed.

"We would argue that this latest rally is mostly a reversal of the same factors that drove oil prices into the 20s earlier this year. We have seen positive changes on U.S. supply and EM, but overall oil fundamentals remain challenging," she said.

"More important for short-term price action has been improved sentiment on the macro front and across risky assets globally. Thus, prices can continue to rally on headlines and a U.S. dollar pullback, but the upside should be limited by bloated global inventories and producer hedging. Moreover, we worry that this latest oil bounce shares many features of the oil rally in the second quarter of 2015, which ultimately resulted in disappointment," Volynsky added.

Analysts at Danske Bank also agreed that it is still "too soon to celebrate".

"The risks to the oil price persist as oil inventories are record high and production is still outpacing demand, leading to a further build-up of already high inventories. As hedges run out for many oil producers this year we could start to see a range of bankruptcies in this sector creating negative headlines," the group said in a research note to clients, published Monday.