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Oil prices slump as energy watchdog cuts demand forecast

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The oil market's declines accelerated sharply Tuesday as evidence of rising U.S. output and a gloomier outlook for demand growth in an International Energy Agency report weighed on prices.

U.S. West Texas Intermediate crude ended Tuesday's session down $1.06, or 1.9 percent, to $55.70, posting its worst daily performance since Oct. 6. The contract plunged to $55.18 at the session low.

Brent crude futures fell $1.04, or 1.7 percent, to $62.12 per barrel after falling as low as $61.36 earlier in the session.

Last week, both benchmarks hit their highest levels since 2015, but traders said the market had lost some momentum since then. 

The IEA on Tuesday delivered a surprisingly downbeat outlook for oil demand in its monthly market report, showing an expected slowdown in consumption that was at odds with a more bullish view from OPEC on Monday.

The Paris-based IEA cut its oil demand growth forecast by 100,000 barrels per day (bpd) for this year and next, to an estimated 1.5 million bpd in 2017 and 1.3 million bpd in 2018.

The IEA said warmer temperatures could reduce consumption, while sharply rising output from outside the producer group OPEC might mean the global market tilts back into surplus in the first half of 2018.

"You cannot have the same forecast at $60 as you have at $40. You need to address that and the IEA is starting to make that adjustment," Petromatrix strategist Olivier Jakob said.

The IEA's report conflicted with OPEC's forecast issued on Monday. OPEC raised it demand outlook by 130,000 bpd from its previous estimate. It now expects oil demand to rise by 1.51 million bpd next year.

Traders said they were cautious about betting on further price rises.

"Prices ... are starting to look like a pause or pullback is needed," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

This sentiment comes in part on the back of rising U.S. oil output, which has grown by more than 14 percent since mid-2016 to a record 9.62 million barrels per day (bpd).

The U.S. government said on Monday U.S. shale production in December would rise for a 12th consecutive month, increasing by 80,000 bpd.

A cooling Chinese economy also stoked some concerns about demand, although so far the country's refiners are processing crude oil near record levels of 11.89 million bpd.

The demand concerns and rising U.S. output appeared to dampen optimism around supply restrictions led by the Organization of the Petroleum Exporting Countries and Russia, which have helped reduce excess stockpiles.

Fitch Ratings said in its 2018 oil outlook that it assumed 2018 "average oil prices will be broadly unchanged year-on-year and that the recent price recovery with Brent exceeding $60 per barrel may not be sustained".

So far in 2017, Brent has averaged $54.5 per barrel.

CNBC's Tom DiChristopher contributed to this report.


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