Oil prices fall 3 percent as investors focus again on glut

NEW YORK (Reuters) - Oil prices fell about 3 percent on Tuesday, reflecting growing concern that a two-month rally was fading as demand fails to keep up with swelling global supply, including new output from Kuwait and Saudi Arabia.

A pump jack and pipes are seen on an oil field near Bakersfield on a foggy day, California January 18, 2015. REUTERS/Lucy Nicholson

Prices bounced, but only briefly, after U.S. Federal Reserve Chair Janet Yellen made remarks that investors saw as dovish for the U.S. interest rate outlook.

Brent LCOc1 futures settled down $1.13 at $39.14 a barrel while U.S. crude CLc1 settled $1.11 lower at $38.28 per barrel.

Prices rebounded marginally in post-settlement trading after data from industry group American Petroleum Institute showed a 2.9 million barrels rise in crude stocks last week, less than the 3.3 million barrels analysts had expected. API

The decision by Kuwait and Saudi Arabia to resume oil production at the jointly operated 300,000-barrel-per-day Khafji field, at a time when production is supposed to be frozen, triggered the selloff in oil, traders said.

“The capacity of that field in the Neutral Zone is more than what Ecuador produces. If they do freeze, it will not be at the January levels but at a lot higher figure,” one trader said, referring to the Kuwait-Saudi border area where Khafji is located.

Yellen told the Economic Club of New York the Fed should proceed “cautiously” with interest-rate hikes because inflation has not proven durable against the backdrop of global risks to the U.S economy.

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Hawkish comments from Fed officials last week triggered a widespread correction in commodities and bolstered the dollar.

“The comments today suggest that it (next rate hike) may be more delayed and the dollar getting whacked is providing support to oil, although oil is still trending to the downside in the short term,” Energy Management Institute analyst Dominick Chirichella said.

The dollar index .DXY slipped to an eight-day low following Yellen's comments, making greenback-denominated commodities cheaper for holders of other currencies.

Oil prices have risen more than 30 percent since mid-February, ahead of an April 17 meeting in Doha where the Organization of the Petroleum Exporting Countries (OPEC) and other major suppliers including Russia will discuss an output freeze aimed at bolstering prices.

But with global inventories swelling and signs some OPEC members are losing market share, the meeting is unlikely to do much to prop up prices, analysts and traders said.

Rising gasoline demand in the United States is not seen keeping pace with the increased worldwide supplies. API data showed a smaller-than-expected draw in gasoline stocks in the week to March 25.

Oil prices sank early after a source familiar with Iranian thinking said Tehran would attend the Doha meeting, but not necessarily take part in negotiations over production freezes.

Market watchers have said the rebound in U.S. crude from 12-year lows touched in February was due more to short covering, rather than improving fundamentals.

Additional reporting by Amanda Cooper in London and Aaron Sheldrick in Tokyo; Editing by Fiona Ortiz, Paul Simao, Alan Crosby and David Gregorio