September 30, 2014 / 7:07 AM / 5 years ago

UPDATE 10-Oil drops to two-year lows, capping quarter-long rout

* Plentiful supplies, strong dollar undermine prices in 3rd qtr

* Brent premium to U.S. crude at lowest in 13 months (Adds API inventory data)

NEW YORK, Sept 30 (Reuters) - World oil prices tumbled to their lowest in more than two years on Tuesday, with U.S. crude posting its biggest daily decline since 2012, as a drop in gasoline prices and end-of-quarter selling capped three months of steep losses.

Oil prices in the United States and Europe have plummeted since the end of June as output from the Middle East, Africa and the United States swamped the market and outweighed fears of supply disruptions from war-torn oil-producing regions.

Falling gasoline prices and a strong dollar contributed to losses on Tuesday. New York RBOB gasoline for October delivery , which expired Tuesday, fell 4 percent, reversing more than half of its gains from a two-week rally that traders had attributed to a short squeeze on local supplies.

Brent for November delivery fell $2.53 to settle at$94.67 a barrel, its lowest since June 2012. The drop marked a 16 percent loss for the quarter, the biggest in two years. Brent has fallen 19 percent since mid June, putting the benchmark near bear market territory.

U.S. crude dropped $3.41 to $91.16 a barrel, its biggest one-day loss since November 2012. U.S. crude ended down 12 percent for the quarter, also its biggest quarterly loss in two years.

During the session, Brent’s premium over U.S. oil dipped to the narrowest in 13 months, touching $2.52 a barrel. The premium later grew back to more than $3 a barrel.

Oil prices were also pressured by the U.S. dollar’s surge to a four-year high against a basket of currencies, and a two-year high against the euro.

End-quarter position squaring by funds and possible oil hedging from Mexico may have also weighed, traders said.

They also cited Reuters’ OPEC survey showing that supply from the producer group in September jumped to its highest in almost two years, due to further recovery in Libya and higher output from Saudi Arabia and other Gulf producers.

“The market remains very oversupplied, and the OPEC survey confirms the market’s fears that the group hasn’t cut back supplies,” said Amrita Sen at Energy Aspects in London.

“With end-of-quarter rebalancing we’ve seen more selling triggered as investors change their allocations, and with the dollar’s strength commodities are getting sold across the board.”

Activity in China’s factory sector showed signs of steadying in September, a private survey showed on Tuesday, easing fears of a hard landing but pointing to a sluggish economy.

U.S. crude oil and distillate inventories likely rose slightly in the week ended Sept. 26, according to forecasts ahead of government data on Wednesday. Gasoline inventories probably fell.

The American Petroleum Institute on Tuesday said oil inventories last week fell 463,000 barrels, gasoline stocks dropped 2.5 million barrels and distillate stocks fell 1.8 million barrels. (Reporting by Edward McAllister and Catherine Ngai in New York and Simon Falush and Sam Wilkin in London; Editing by Keiron Henderson, Jane Baird, Peter Galloway, David Gregorio and James Dalgleish)

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