US oil hits a fresh 5-1/2-year low; down 15% YTD

Reuters with CNBC
Men work on an oil pump during a sandstorm in the desert oil fields of Sakhir, Bahrain, January, 2015.
Hasan Jamali | AP

Oil hit a near six-year low on Tuesday, with U.S. crude paring some losses on short covering and reaching parity with for the first time in three months, as traders continued to wonder when the six-month long price rout might end.

Oil prices are have already traded lower for seven consecutive weeks, and so far this week Brent is down 8 percent and U.S. crude down about 5 percent.

U.S. crude settled down 18 cents, at $45.89 a barrel, its lowest level since April 2009. Brent crude was down $1 at $46 a barrel after a session low at $45.19.

The arbitrage between U.S. crude and Brent crude oil futures traded at parity for the first time since October, with both markets at $46 a barrel at one point.

Traders said it was not immediately clear why the benchmarks converged, but analysts said it was a combination of oversupplied global markets coupled with short covering on the U.S. crude contract.

Read MoreOil falls below $45 as OPEC plays hardball

"The stock market rallied and that helped U.S. crude and the $44 a barrel level had been a target number for traders and U.S. crude held above that early on Tuesday," said Phil Flynn, analyst at Price Futures Group in Chicago.

Prices were little changed after the U.S. Energy Information Administration raised its 2015 world oil demand growth forecast by 120,000 barrels per day from its previous estimate. In its monthly forecast, EIA projected 2016 world oil demand to hit 93.42 million bpd, up 1.03 million bpd from 2015.

Crude's tipping point
Crude's tipping point

Oil's plunge earlier in the session came after big producer United Arab Emirates defended OPEC's decision not to cut output.

Read MoreShort sellers ganging up on oil companies

The United Arab Emirates' oil minister, Suhail bin Mohammed al-Mazroui, said on Tuesday that OPEC's decision in November not to cut output had been right. He also said that U.S. shale oil was an important part of global oil supplies.

"Shale oil producers are very important for the market supply and we all need them to stay,'' he said, adding that the market would stabilize at a level at which conventional producers can sell profitably, "whether $60 or $70 or $80.''

Adding to the glut are slowing Asian economies, which now face deflationary pressures.

"Even without the full effect of the recent collapse in energy prices, GDP deflator in the region (Asia) ... is estimated to have slipped. We believe that weaker aggregate demand is at the heart of this generalized deflationary pressure,'' U.S. bank Morgan Stanley said on Tuesday.

Read MoreOil is at or near a bottom: Strategist

The downward pressure on prices is so big that even record Chinese crude imports for December could not lift the market for long. China imported above 7 million barrels a day for the first time as the world's No. 2 oil consumer took advantage of low prices to build up reserves.

Meanwhile, banks have slashed their oil price outlook, with analysts at Goldman Sachs cutting their average forecast for Brent in 2015 to $50.40 a barrel from $83.75.