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Oil prices steady as economic fears offset Saudi output cut

(Reuters) - Oil prices were little changed on Tuesday after erasing earlier losses as worries over sluggish global economic growth that could reduce energy demand offset Saudi Arabia's pledge to deepen output cuts.

Brent futures remained unchanged at $76.71 a barrel at 11:18 a.m. EDT (1518 GMT), while U.S. West Texas Intermediate (WTI) crude rose 12 cents, or 0.2%, to $72.27.

Earlier in the session, WTI was down $2 a barrel and Brent down almost $2.

Growing interest in energy trading in recent weeks boosted open interest in WTI futures on the New York Mercantile Exchange to its highest level since March 2022 for a fourth day in a row on Monday.

Brent gained as much as $2.60 a barrel on Monday and WTI as much as $3.30 after Saudi Arabia, the world's top exporter, said at the weekend that its output would drop by 1 million barrels per day (bpd) to 9 million bpd in July.

But weaker demand, stronger non-OPEC supply, slower economic growth in China and potential recessions in the U.S. and Europe mean the Saudi cut is unlikely to achieve a "sustainable price increase" into the high $80s and low $90s, Citi analysts said in a note on Tuesday.

The U.S. dollar, meanwhile, rose to its highest level against a basket of currencies since hitting a 10-week high on May 31 as investors waited on fresh signals on whether the U.S. Federal Reserve (Fed) will raise or hold interest rates in June.

A stronger dollar can weigh on oil demand by making the fuel more expensive for holders of other currencies.

One of those signals came from the U.S. services sector, which barely grew in May as new orders slowed.

"The market remains focused on the risk to demand, with recession concerns mounted on a broad-based miss in U.S. services PMI (Purchasing Managers' Index), giving room for a Fed pause on rates," said Ole Hansen, head of commodity strategy at Saxo Bank.

Higher interest rates boost borrowing costs, which can slow the economy and reduce oil demand.

The mood was further dented by data showing that German industrial orders fell unexpectedly in April.

"If upcoming economic data suggests entrenched inflationary pressure and investors bet on further hikes in interest rates, demand predictions could be revised downwards, effectively neutralising the ostensibly bullish impact of the latest (OPEC+) output decision," said Tamas Varga at brokerage PVM.

Looking ahead, the market is waiting for data this week from the U.S. and China that could provide fresh demand indications in the world's two biggest oil consumers.

China, the second-biggest oil consumer, will release its May trade data on Wednesday.

The U.S. Energy Information Administration (EIA) will release its short-term energy outlook around 12 noon EDT on Tuesday, which will be followed by U.S. oil inventory data from the American Petroleum Institute (API), an industry group, at 4:30 p.m. EDT.

The EIA will release its U.S. oil inventory data at 10:30 a.m. EDT on Wednesday.

Analysts forecast U.S. energy firms added about 1.5 million barrels of crude into storage during the week ended June 2, according to a Reuters poll.

That would be the second weekly increase in a row and compares with an increase of 2.0 million barrels in the same week last year and a five-year (2018-2022) average increase of 2.3 million barrels.

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