Oil Eases as Oversupply Impacts Markets

U.S. oil rises 2 pct despite oversupply; surplus conditions to keep gains in check.

Oil prices eased on Tuesday, dragged lower by a broad decline across major financial markets and by a growing expectation that global demand will not grow quickly enough to erase the overhang of unwanted crude any time soon.

The world will store unwanted oil for most of 2016 as declines in U.S. output take time and OPEC is unlikely to cut a deal with other producers to reduce ballooning output, the International Energy Agency said.

The agency cut its forecast for 2016 oil demand growth, which now stands at 1.17 million barrels per day (bpd) following a five-year high of 1.6 million in 2015, and reduced its estimate of demand for OPEC crude.

Oil traders are even more bearish.

The world's largest, Vitol, said it expects global oil demand to grow by around 1 million bpd this year, down from last year's rate 1.6 million bpd.

"I don't think we can rely on low prices driving much incremental demand at this point," Vitol executive member Chris Bake said at an IP Week conference.

Brent crude futures were last down 26 cents at $32.62 a barrel by 1330 GMT, down from Monday's session high of $34.68. U.S. futures were down 10 cents at $29.59.

Financial markets have been rattled in the last week by concern about banks given signs of a potential global slowdown, prompting buying of perceived safe-haven assets such as gold , German Bunds and the Swiss franc.

Oil, which had gained nearly 30 percent in the two weeks to early February, breaking above $35, has receded, in line with a retreat in stocks and industrial commodities.

Echoing the view of the IEA, a Reuters survey showed U.S. crude stocks likely rose by 3.9 million barrels in the week ended on Feb. 5, meaning global oversupply is unlikely to abate any time soon.

"The fundamentals haven't shifted. The market remains in surplus, and while that's the case, it is very difficult for prices to sustain any gains," said Michael McCarthy, chief market strategist at CMC Markets in Sydney.

There is also little sign of any coordination on production cuts among big producers outside the United States after weekend talks between OPEC members Saudi Arabia and Venezuela yielded no concrete result.

"Such cuts would after all restore equilibrium to the oil market. However, we think there is little prospect of this actually happening, as the interests and motives of the relevant countries are too different," Commerzbank said in a report.

"The reduction of oversupply will have to come from elsewhere, namely from falling U.S. oil production."

By Amanda Cooper