Here's Why Oil Fell Three Percent Today

By Barani KrishnanOilReuters

Oil prices settled down as much as 3 percent on Tuesday after forecasts from producer group OPEC and a leading energy market body focused on consumers indicated a global crude supply glut could persist into next year.

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The International Energy Agency (IEA), which advises oil-consuming countries on their energy policies, said a sharp slowdown in oil demand growth, coupled with ballooning inventories and rising supply, means the market will be oversupplied at least through the first half of 2017.

The IEA's comments follow a surprisingly bearish outlook from the Organization of the Petroleum Exporting Countries on Monday that also pointed to a larger surplus next year due to new fields in non-member countries. U.S. shale drillers are also proving more resilient than expected to cheap crude, OPEC said.

"It seems the situation has deteriorated strongly in the eyes of OPEC, as well as the IEA," said Commerzbank head of commodities strategy Eugen Weinberg.

"I wouldn't be surprised to see this price weakness continue for a while, because that was not on the cards, in our opinion."

A stronger dollar also weighed on crude and other commodities denominated in the U.S. unit, making them less affordable to holders of currencies such as the euro. U.S. equity markets were down nearly 2 percent, extending the bearish sentiment across risky markets.

Brent crude settled down $1.22 or 2.5 percent, at $47.10 a barrel.

U.S. West Texas Intermediate crude fell $1.39, or 3 percent, to settle at $44.90.

Analysts expect U.S. government data for the latest week on Wednesday to show a stockpile build of 3.8 million barrels of crude. The American Petroleum Institute (API) at 4:30 p.m. (2030 GMT) on Tuesday will release its own weekly supply-demand report, seen as a precursor to the government data.

On Monday, oil prices rose on the back of a weak dollar and reduced expectations that U.S. Federal Reserve will raise interest rates in September.

Even so, expectations of U.S. monetary tightening before the end of the year, along with the bleak demand outlook projected by the IEA, further diminished market optimism that the world's largest oil producers might agree to freeze output when they meet for talks in Algeria on Sept. 26-28.

"The idea of an oil production freeze makes even less sense if demand falls apart while U.S. monetary stimulus is being removed at the same time," said David Thompson, executive vice-president at Powerhouse, a commodities-focused brokerage in Washington.

(Additional reporting by Amanda Cooper in LONDON and Mark Tay in SINGAPORE)

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