US oil closes lower at $38.28; Iran unlikely to freeze output

Oil prices fell on Tuesday, reflecting growing concerns that a two-month rally may be fading, as supply looked set to keep rising and there appeared to be little immediate prospect of demand keeping pace.

Brent crude futures fell $1.04, or 2.58 percent, to $39.26 a barrel. U.S. crude settled $1.11 lower, at $38.28 a barrel, its lowest settlement since March 15.

Earlier, prices briefly pared losses after Federal Reserve Chair Janet Yellen delivered remarks on the U.S. economy and monetary policy.

Yellen, speaking to Economic Club of New York, noted in prepared remarks that recent readings on the strength of the U.S. economy since the beginning of the year have been mixed.

In fact, Yellen said that only gradual increases in the federal funds rate are likely to be warranted in coming years, and global developments have increased the risks associated with the Fed's economic outlook.

The oil price has risen more than 45 percent since mid-February ahead of a meeting next month of the world's major producers to discuss an output freeze. But there is growing skepticism about the outcome of the meeting.

"Verbal intervention, which has obviously helped the market greatly over the past two months, combined with a production slowdown in the U.S., has probably taken (oil) as far as it can. Now the market really wants to see some action," Saxo Bank senior manager Ole Hansen said.

"We're seeing more and more commentators raise the flag and saying 'have we seen too much, too soon?' in terms of the rally across the sector."

OPEC and other major suppliers, including Russia, are to meet on April 17 in Doha to discuss an output freeze aimed at bolstering prices.

The oil price touched session lows earlier after a source familiar with Iranian thinking said Iran would attend the meeting, but this did not mean it would take part in negotiations over production freezes.

Kuwait said on Tuesday it had agreed with Saudi Arabia to resume production at the jointly operated Khafji field, which shut in October 2014 for environmental reasons, having been producing between 280,000 and 300,000 barrels per day.

With ballooning global inventories, signs some OPEC members are losing market share, plus little evidence of a strong pick-up in demand, analysts said oil is likely to trade in a range.

"There is a rebalancing on the way, but we are still running a surplus and stocks are building up as far as we can see," SEB commodities analyst Bjarne Schieldrop said.

"There is a clear risk for a pull-back in Brent crude oil with a return to deeper contango again. Long positioning in Brent is at record highs and vulnerable for a bearish repositioning."

Data on Monday from the InterContinental Exchange showed speculators hold the largest net long position in Brent futures on record.

U.S. commercial crude stockpiles were expected to have reached record highs for a seventh straight week, while refined product inventories likely fell, a Reuters survey showed late on Monday.

— CNBC's Tom DiChristopher and Everett Rosenfeld contributed to this story.