The oil market's biggest problem is still far from solved

The worst of the crude oil supply glut may not be over.

In the last few weeks, sentiment about the oil market has improved.

This happened, in part, after supply disruptions hit Nigeria and Canada. Additionally, Goldman Sachs analysts said the imbalance between supply and demand may be correcting faster than they had expected.

But Adam Longson, head of commodity research at Morgan Stanley, is not yet convinced.

In a note Monday, he said the physical oil market is barely responding to supply disruptions.

Rising oil storage floating in tankers on the world's oceans and global gasoline stocks were among the concerning signs he pointed out.

"The poor physical market response suggests the worst of the market oversupply may not be over, which could be problematic as outages resolve," Longson wrote to clients.

For example, even after rebels took out up to 900,000 barrels per day of Nigerian production, as many as 20 cargoes for June delivery remain unsold and floating off the West African coast. And last week, Reuters reported that oil stored off Singapore's coast rose 10% week-on-week despite outages.

Longson again:

Southeast Asia floating storage is getting worse, with offshore volumes reaching the highest level in at least 5 years and continuing to rise WoW. The growing glut suggests oil markets are not as healthy as sentiment suggests. Similar situations are being repeated in the Gulf of Mexico and North Sea, but to a lesser degree, and product markets show a number of similar unhealthy trends.

Longson noted that the prompt Brent contract remains in contango, meaning that the spot price is cheaper than prices for future delivery. This is usually a sign that the market is oversupplied, and encourages traders to lock up inventories they can sell for higher prices later.

These so-called arbitrage trades have become unprofitable, Longson said. However, they hide the fact that traders are making many of them with increasing amounts of debt, he said.

The worst oil crash in a generation happened in the first place because producers pumped out more crude than anyone needed.

And even now, many cargoes of oil are sitting on the world's oceans with few willing buyers.