Oil edged lower on Monday on signs that a multi-week rally was encouraging a rejuvenation in already bloated U.S. shale supplies, even as the government expected less output in June from the fastest-growing fields.
Last week, U.S. crude prices gained on a weekly basis for an eighth straight week while Brent had its decline after four weeks of gains.
In a sign that the market was responding to those price gains, rigs for drilling oil in the voluminous Permian shale basin rose last week for the first time this year after months of cutbacks.
Still, the U.S. Energy Information Administration expects output from the fastest-growing U.S. shale plays to drop 71,000 barrels per day in June to 4.97 million bpd.
"It's pretty choppy as people try to figure out a clearer supply-demand situation," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.
While he was not a believer of the recent market runup, McGillian said there were no signs the rally was over and "we could ultimately be setting ourselves up for an even sharper decline later".
U.S. crude futures settled down 14 cents at $59.25 a barrel.
Brent crude futures, the more globally referenced benchmark for oil, fell 48 cents to end at $64.91.
The dollar rebounded, weighing further on commodities such as oil that are priced in the currency. [FRX/]
But the impact of the stronger dollar was cushioned somewhat by China's third rate cut in six months, which raised hopes the world's No. 1 energy consumer will absorb some of the excessive supplies.
Last week, hedge funds and other big speculators raised bets for a seventh consecutive week that crude prices will rise, exchange data showed.
But analysts raised concerns over a growing disconnect between the futures market, which has gained more than 40 percent since its January low, and a growing physical supply glut.
Rising supplies, more activity on the shale side and potentially higher OPEC output were all weighing on the outlook for oil, analysts at Morgan Stanley said.
"We have growing concerns about crude fundamentals in the second half of 2015 and 2016," the Wall Street bank said in a note to clients.
Oil's recent rally also appeared technically exhausted, chartists said on Friday, noting that Brent's halted advance after it had hit 2015 highs last week.
Investors will be looking at Wednesday's monthly report from the International Energy Agency to see if falling oil prices have boosted global demand for oil.
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