The oil rally is deflating

The brief rally of oil prices we saw earlier in the week could be over before it started as both American and Brent crude oil slipped under $40 a barrel on Thursday.

At the time of writing American crude (WTI) is at $39.06, while Brent crude oil is at $39.67.

The US Energy Department said that US crude oil reserves were higher than expected last week, a sign that the oil industry's oversupply problems will continue indefinitely.

Tom Cross of Trustnet Direct told This Is Money that "crude oil inventories surged up by 9.4 million barrels in the week ended March 18, reaching historically high levels for this time of year, and much more than economists had expected."

This is the first time in a week that either WTI or Brent oil have fallen below $40, and puts a dampener on hopes that oil's recent uptick was part of a longer trend.

However Brent is still up 46% from its January low, while American crude is is up 49% from a February low.

This chart shows the decline of WTI American crude in the last couple of days:

Meanwhile here's Brent oil's performance in the same period:

The Financial Times reports that Bank of America Merrill Lynch is expecting a "W-shaped" recovery for oil, while Goldman Sachs is more pressimistic about any change to the "commodity rout." Either way, the oil oversupply that's hampering prices is still costing producers money.

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