Oil prices have dropped, closing out the largest monthly decline in two years on supply worries after OPEC output reached a 2018 high in July, overshadowing reports that the US and China might reopen trade talks that could boost demand.

October Brent crude futures fell $US1.34 to settle at $US74.21 a barrel on Tuesday.

The September contract, which expires later on Tuesday, settled at $US74.25, while US crude futures fell $US1.37, or nearly 2 per cent, to settle at $US68.76.

Brent lost more than 6 per cent in July, while US crude futures slumped about 7 per cent, the biggest monthly decline for both benchmarks since July 2016.

Oil prices extended losses in post-settlement trade, with US crude at $US68.32 a barrel, after data from the American Petroleum Institute showed domestic crude inventories rose 5.6 million barrels last week.


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A Reuters poll forecast stocks fell 2.8 million barrels.

The US Energy Information Administration data is due on Wednesday.

Signs that a supply disruption in the Bab al-Mandeb Strait in the Red Sea could be resolved weighed on prices throughout the trading session, said John Kilduff, partner at Again Capital Management.

Yemen’s Houthi group said it was ready to unilaterally halt attacks in the Red Sea to support peace efforts. Saudi Arabia suspended oil shipments through the strait last week after the Houthis attacked two Saudi oil tankers.

Russia and the Organization of the Petroleum Exporting Countries boosted output in July, according to a Reuters production survey on Monday.

It showed OPEC members boosted output in July by 70,000 barrels per day to 32.64 million bpd, a high for the year.

‘We’re seeing some more production come online, so that weighs on prices,’ said Phil Flynn, analyst at Price Futures Group.

A Reuters poll showed that oil prices are likely to hold fairly steady this year and next as increased output from OPEC and the US meets growing demand led by Asia and helps to offset supply disruptions.

OPEC has pledged to offset the loss of supply from Iran, the group’s No. 3 producer.

Looming US sanctions have already started to cut Iranian exports.

Iran said US President Donald Trump was mistaken to expect Saudi Arabia and other oil producers to compensate for supply losses caused by US sanctions.

The market largely overlooked reports that US and China may restart negotiations to defuse the trade war between the two countries.

An end to the ongoing trade dispute could boost overall oil-market demand.