Oil fell 3 percent on Tuesday, extending losses for a second straight day, as market participants cited technical resistance after prices ran above $40 a barrel and worry that U.S. crude stockpiles had continued to rise despite falling production.
Uncertainty over how the Federal Reserve will word its policy statement on Wednesday also fed jitters in financial markets despite expectations the U.S. central bank will signal a slower pace of interest rate hikes.
Crude had rallied about 50 percent over the past six weeks as talk that major oil producers planned to freeze output at January levels boosted a market that sank to 12-year lows on a supply glut.
But after soaring to three-month highs of more than $41 a barrel on Brent and above $39 on U.S. crude last week, the rally had hit technical fatigue, analysts said.
U.S. government data on Wednesday was expected to show crude inventories at record highs for a fifth week in a row even with shale oil production down.
A production freeze plan by OPEC and Russia has made little progress, with No. 4 oil producer Iran still determined to double or restore its crude exports to pre-sanction levels before limiting any output.
"The rally is now retreating on fears that OPEC will continue to flood the market with oil in a world where demand may falter," said Phil Flynn, analyst at the Price Futures Group in Chicago.
Brent was down $1.10, or 2.6 percent, at $38.43 a barrel by 11:49 a.m. EDT (1549 GMT).
U.S. crude was off $1.21, or 3 percent, at $35.97 a barrel.
U.S. gasoline futures, also known as RBOB, fell for a second straight day too, sliding 2 percent to $1.3970 a gallon.
"The rot is setting in," technical analysts at PVM Associates in London said in a commentary, citing potential threat to support for Brent at $38.34 and for U.S. crude at $36.04. They also noted RBOB's failure to hold above the eight-day moving average of $1.41.
But some said the market appeared to be pacing the slide and it was too early to call the rally over.
"While the advance in crude oil prices has paused, I think the bears might have been hoping for a larger reaction to the downside," said David Thompson at Washington-based commodities brokerage Powerhouse. "If prices were to break below $35, then my view would turn more bearish."
(Reuters)
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