Oil prices edged up in early trading on Tuesday after US crude broke below $40 per barrel the previous session, but traders said fuel markets continued to be dogged by excess production.

US West Texas Intermediate (WTI) crude was at $40.16 a barrel at 0148 GMT (9:48 p.m. ET on Monday), up 10 cents from its last close after dipping below $40 for the first time since April the previous session.

International Brent crude oil futures were trading at $42.34 per barrel, up 20 cents from their last close.

Despite the slightly higher prices early on Tuesday, analysts said that overproduction in crude as well as the refining sector was still weighing on markets.

As a result, refiners will likely reduce orders for new crude feedstocks, putting more short-term downside pressure on prices, and instead start to draw down on brimming inventories.

"Crude demand growth will soften as throughput in the refining sector moderates in reaction to low margins. This should result in greater fuels stock draws, but at the expense of slowing the downtrend in crude stocks," BMI Research said in a note to clients.

In a sign of glutted markets, Singapore's light distillates stocks are around 15 million barrels, up from 13 million barrels in late June, and close to record levels.

As a result of the oversupplied market, Singapore's overall fuel refinery margins are now averaging around $3.50 per barrel, a mere third of their 2016 highs from January.

Financial oil traders have taken note of the physical oversupply, with hedge funds taking on large volumes of bets that would profit from lower prices.

"The latest (US regulatory) CFTC data show that speculators increased their shorts (aka bearish bets) by the biggest volume on record in last week's data for WTI crude. This is the biggest increase since data began back in 2006, dragging the net long position in WTI to its lowest since February," said Matt Smith of US-based ClipperData in a note.

"Another bearish development from the CFTC data has been gasoline positioning. Speculative positions in gasoline have moved to a record net short position as hedge funds bet on an ongoing gasoline supply glut," he added. – Reuters