Oil prices fell as much 1 percent for a second day in a row on Tuesday as a rallying dollar and a global fuel glut offset forecasts for lower U.S. crude stockpiles that typically would have been bullish for the market.
U.S. crude stockpiles fell by 2.3 million barrels last week, trade group American Petroleum Institute (API) reported. That was just above a 2.1 million-barrels draw forecast in a Reuters poll. The U.S. government's Energy Information Administration (EIA) will issue inventory data on Wednesday.
If the EIA confirms a drawdown, it will be the ninth straight week that U.S. crude stockpiles have fallen.
Even so, the market's attention has been on an unexpected oversupply in fuels during the U.S. peak summer driving season.
As storage on land tightened in recent weeks, fuel prices weakened, prompting traders to store diesel on tankers at sea for later delivery. Even if crude output tapers, some say the glut may continue to pressure prices.
"Unless crude imports fall totally out of bed, there's ample oil in the tanks, and the headline numbers for crude won't be as bearish as the total numbers," said Kyle Cooper, oil markets consultant for New York-based broker ION Energy.
For distillate inventories including diesel, API reported a surprise draw of 484,000 barrels. It also said there was an unexpected gasoline build of 805,000 barrels.
"We expect fresh lows by tomorrow that should force out some recently acquired speculative longs that have been entering the market amidst the price consolidation of the past eight to nine sessions," said Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates.
Brent crude settled down 30 cents, or 0.6 percent, at $46.66 barrel. It fell 1.4 percent on Monday.
U.S. crude West Texas Intermediate (WTI) crude fell 59 cents, or 1.3 percent, to settle at $44.65. WTI lost 1.6 percent in the previous session. It marks the lowest settle since May 9, when oil settled at $43.44.
Brent's premium to WTI reached its highest since the end of April, raising the export potential for U.S. crude.
Both benchmarks were little changed after the API data.
Also weighing on oil was the dollar's rally to a four-month high, making greenback-denominated oil less affordable for holders of the euro and other currencies.
Earlier in the session, a protest over wages that shut the eastern Libyan oil terminal of Hariga and forced a suspension of 100,000 barrels per day of crude production helped the market limit some losses.
The market's attention has gravitated more toward the glut in fuels. Weak prices have prompted traders to store diesel on tankers at sea for later delivery, as storage on land tightens. Even if crude output tapers, some traders say sustained price recovery will be hard due to the glut.
"We are about to enter a period where the crude oil markets could start to feel more fully the pressure resulting from the come-back of Iran," said Olivier Jakob at consultancy Petromatrix, referring to the lifting of economic sanctions against Iran earlier this year.
"Saudi Arabia is moving out of its peak seasonal demand for crude oil right when global refining margins are under strong pressure, and that is not a good combination."
Saudi Arabia fell behind Iraq as the No. 1 oil supplier to India in June, losing out in sales of heavy crude Indian refiners use for making bitumen to build roads.
Giving some support to prices, China's crude oil imports — which slowed partly due to seasonal refinery maintenance in May and June — could rebound in the second half of the year as refineries there further diversify sources of supply, shipbroker Banchero Costa (Bancosta) said in a report on Tuesday.
China's crude imports grew 14.2 percent over January-June, with most of the gains coming from huge increases in supply from Russia, Oman, Iraq and Brazil, said Ralph Leszczynski, head of research at Bancosta.