Oil prices dipped on Tuesday as speculators took profits for a second day after big third-quarter gains and on concerns that higher prices might spur increased US shale production.

Brent crude futures closed down 12 cents or 0.2 per cent to $56.00 a barrel, having lost almost 2.5 per cent on Monday. US crude futures fell 16 cents or 0.3 per cent to $50.42.

Brent notched up a third-quarter gain of about 20 per cent, the biggest increase for that quarter since 2004, and traded as high as $59.49 last week, but has since fallen about 6 per cent.

“Youve reached a place where the market needs a drumbeat of positive information to sustain a rally,” said Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut.

“The question is if demand and the supply cut are enough to offset the increase in (US) production thats coming.”

Oil rose slightly on Tuesday following comments from OPEC Secretary–General Mohammad Barkindo that compliance with the oil output cut deal between OPEC and non-OPEC nations is extremely high. He added that the global oil cartel was looking forward to strengthening its cooperation with Russia.

Last week prices rose on tension in Iraqi Kurdistan after the region’s independence vote, with Turkey threatening to close a pipeline that brings oil from the region in northern Iraq to the Mediterranean. Turkey has not carried out the threat, analysts said.

However, Middle Eastern oil producers are concerned the price rise will stir US shale producers into more drilling and push prices lower again.

“Any time we get above 50 dollars a barrel drilling starts to ramp up, and thats going to bring the price of oil back down again,” said Mark Watkins, regional investment manager at US Bank.

“Tomorrows report well have to look at that data,” he said, referring to the Energy Information Administration's closely watched weekly crude market report that comes out Wednesday morning.

After settlement, the American Petroleum Institute said US crude stocks fell more than expected last week as imports dropped, while petrol inventories increased and distillate stocks drew. The industry group said crude inventories fell 4.1 million barrels in the week to Sept. 29 to 465.4 million, compared with analysts’ expectations for a decrease of 756,000 barrels.

Offering a small boost was the expected drop in supply next month of the four largest North Sea crude grades that underpin the dated Brent benchmark.

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