Oil prices erased much of Monday's gains as an agreement between Iraq and the Kurdish regional government portended more supplies for a global market already brimming with crude.
Light, sweet crude for January delivery fell $2.12, or 3.1%, to $66.88 a barrel on the New York Mercantile Exchange. The global Brent benchmark fell $2, or 2.8%, to $70.54 a barrel on the ICE Futures Europe exchange.
Iraq and semiautonomous Kurds in the northern region of the country have been locked in a yearslong feud over sharing revenue from oil production, culminating with the Kurdish regional government exporting several cargoes independently of Baghdad earlier this year through a pipeline to Turkey. But Iraqi media and a Kurdish lawmaker said Tuesday that the sides had reached an agreement.
The agreement, which would take effect Jan. 1, allows Kurdistan to export 250,000 barrels a day while the disputed region of Kirkuk would sell 300,000 barrels a day through Iraq's national oil company. In exchange, the Kurdish region would receive 17% of Iraq's national budget, and the defense ministry would provide direct financing to Kurdish fighters for training and arms.
Andrew Lebow, a trader for investment banking boutique Jefferies, said the oil market appeared to give credence to the agreement.
"The market may be taking this one more seriously than others," Mr. Lebow said. "This could result in more supply on the market, which is the last thing we need."
The news added to the already bearish conditions in the oil market. The two major benchmarks are off about 38% from their highs in June as the world market has become awash in an abundance of crude thanks to increased oil exports from Iraq and Libya among others, as well as shipments of refined petroleum products from the U.S. The market's slide deepened last week after ministers from member nations of the Organization of the Petroleum Exporting Countries failed to reach an agreement that would curtail output and shore up prices.
Meanwhile, traders appeared eager to take profits from Monday's run-up, when U.S. futures gained more than 4% in the absence of any bullish fundamental developments in the market.
"We don't really have a fresh compelling fundamental story here," said Tim Evans, an analyst at Citigroup. "It's more a question of where does the price belong given the fundamentals we already know."
Those fundamentals look set to turn even more bearish in the coming months, with analysts and traders saying a period of moderately priced oil is likely to prevail as a new normal for some time. London-based research consultancy Energy Aspects said in a note that global surpluses will grow through the first half of 2015 as output rises and demand for OPEC crude falls.
In the U.S., analysts were projecting a 600,000-barrel increase in crude stockpiles when weekly data are released by the Energy Information Administration on Wednesday. The U.S. has 383 million barrels of crude in storage, above average for this time of year.
Tuesday's selloff carried over into refined product markets, with gasoline for January delivery falling 6.94 cents, or 3.7%, to $1.8116 a gallon, the lowest settlement in more than five years.
January diesel settled at its lowest level in more than four years, losing 5.8 cents, or 2.6%, to close at $2.1544 a gallon.
(Matt Bradley and Ghassan Adnan contributed to this article.)