Investor Pullback, Rising U.S. Output Weigh on Oil

Oil prices tumbled Tuesday as investors became more cautious and fled from risky assets and rising U.S. production threatened to undercut oil's recent rally.

U.S. crude futures fell $1.06, or 1.62%, to $64.50 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 44 cents, or 0.63%, to $69.02 a barrel on ICE Futures Europe.

Tuesday's losses extended a slide that began Monday -- both benchmarks posted their largest two-day losses since December.

Oil prices have hit three-year highs this month on the back of strong demand, geopolitical risks, a weaker U.S. dollar and efforts by the Organization of the Petroleum Exporting Countries to curb supply. But the higher prices have motivated U.S. shale producers to increase production, a move analysts say could limit the price upside.

Investor enthusiasm for oil also has led to lopsided bets that may have made the market vulnerable to sharp selloffs. Hedge funds, pensions and other speculative investors have amassed their largest net bullish positions in U.S. crude futures on record.

"It's gone up too far, too fast and was due for a correction," said Michael Hiley, head of over-the-counter energy trading at LPS Futures LLC. "It's a similar feeling to the stock market -- both are running hard and both the stock market and oil are correcting."

U.S. stocks dropped sharply Tuesday, extending Monday's losses.

Analysts at TAC Energy said trading this week could point to renewed ties between oil and other financial markets.

"Energy prices are selling off for a second day as fundamental and financial fears seem to have temporarily gripped markets around the globe," the analysts said. "If the old correlations come back into play, we'll probably have to watch moves in stocks and interest rates for daily direction -- as we did from 2009-2014, rather than waiting on every OPEC announcement as we've been doing the past few years."

At the same time, renewed concerns about mounting U.S. crude production are also weighing on oil prices. Brokerage PVM Oil Associates Ltd. anticipates that output could approach the symbolic 10 million barrels a day market this week when the U.S. Energy Information Administration reports production data. The number of rigs drilling for oil in the U.S., a proxy for activity, ramped up once again last week.

"U.S. oil production is rising and forecasts have moved up," said Ehsan Ul-Haq, director for crude oil and refined products at Resource Economist Ltd. "Oversupply is becoming the problem -- with more and more U.S. crude we are going to be drowning in oil," he said.

The International Energy Agency said earlier this month that it expects U.S. production to surpass that of Saudi Arabia, climbing above 10 million barrels a day in 2018 -- topping a high last seen in 1970.

A slightly stronger U.S. dollar has also weighed on prices this week. The U.S. currency has had, overall, its worst 12 months since 2011, falling to three-year lows last week and bolstering crude prices, although the dollar turned lower Tuesday.

Still, oil supplies have been steadily tightening -- something that has helped propel prices to recent highs. Oil market observers are looking ahead to Wednesday and the U.S. Energy Information Administration's weekly report on U.S. crude inventories, which have fallen for 10 straight weeks, and production data.

OPEC and 10 producers outside the cartel, including Russia, agreed at the end of last year to extend an agreement to hold back crude output by 1.8 million barrels a day through to the end of this year. The accord, first struck in late 2016, was meant to rein in a global supply glut that has weighed on prices for over three years and bring global inventories back down to the last five-year average.

Fuel prices posted their biggest daily losses since December. Gasoline futures fell 3.95 cents, or 2.04%, to $1.8954 a gallon. Diesel futures fell 3.31 cents, or 1.57%, to $2.0717 a gallon.

Write to Alison Sider at alison.sider@wsj.com and Christopher Alessi at christopher.alessi@wsj.com