US oil settles down 44 cents, or 0.9%, at $46.66 a barrel

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.
Nick Oxford | Reuters

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Oil prices slipped on Tuesday afternoon as investors focused on a bearish outlook from the International Energy Agency after U.S. crude gained on technical support earlier in the session.

Global benchmark Brent crude was down 30 cents a barrel at $49.50, while U.S. crude was flat at $47.10, paring early gains of over a dollar on technical trade.

The IEA said the world oil market would remain oversupplied for at least another year despite falls in output from non-OPEC producers.

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"(Monday's) sharp drop lower is being deemed an overreaction," said energy analyst Tony Headrick of Minnesota-based commodity brokerage CHS Hedging. Oil fell 5 percent on Monday as traders took profits after last week's surge to an 11-week high.

Traders also noted a weaker U.S. dollar, which hit a three-week low earlier on Tuesday, added some support to the higher crude prices.

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"There is some uncertainty in the trading markets about the direction of the U.S. dollar, with some trading action in oil reflecting hopes that the U.S. dollar declines further," said Richard Hastings, macro strategist at Seaport Global Securities.

The focus of the market is slowly moving away from the existing glut to possible future tightening and a potential price spike, analysts at Energy Aspects said.

"Rightly so, in our view, given accelerated declines in U.S. output have kick-started the rebalancing process," Energy Aspects analysts Amrita Sen and Robert Campbell said in a note.

Oil's recent sharp price recovery is eerily like the bounce seen late last winter, said Edward Morse, global head of commodities research at Citi in New York.

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"Both followed a period of price stability following a sharp decline. Both appear to be spurred on by unverifiable assumptions surrounding single data points. Both are driven by sentiment and financial flows rather than clear market fundamentals," Morse added.

Investors awaited data on U.S. oil inventories from the American Petroleum Institute (API) on Wednesday and the Energy Information Administration (EIA) on Thursday. Release of the data was delayed a day because of the U.S. Columbus Day holiday.

A Reuters survey estimated that U.S. crude stockpiles increased by 2.8 million barrels on average in the week ended Oct. 9.