Brent crude set for biggest monthly drop since 2016

By Amanda Cooper

LONDON (Reuters) - Oil dropped on Tuesday and Brent futures were on track for their largest monthly decline in two years after a survey showed OPEC's output hit a 2018 high in July, reigniting concern about supply swamping demand.

The Reuters survey released on Monday showed that OPEC increased production in July by 70,000 barrels per day (bpd) to 32.64 million bpd, a high for the year.

October Brent crude futures fell 91 cents to $74.64 a barrel by 1353 GMT. The September contract expires later on Tuesday. U.S. crude futures fell $1.28 to $68.85.

Brent has lost 5.7 percent this month, in its largest one-month slide since July 2016. U.S. futures have fallen by slightly less than this, but are still on track for their biggest monthly decline since last October.

Russian energy minister Alexander Novak said last week that Russia's output will hit a new 30-year high of 11.02 million bpd IN 2018.

OPEC has pledged to offset the loss of Iranian supply as upcoming U.S. sanctions have already started to cut exports from OPEC's third-largest producer.

"On the supply side, the latest news from Russia shows they increased production by around 300,000 bpd ... as well as an increase in production in the OPEC survey," Saxo Bank senior manager Ole Hansen said.

"The global balance (between supply and demand) has softened and has been less tight in July, hence the sell-off we've seen."

U.S. President Donald Trump appeared to soften his approach to Iran, saying on Monday he would be willing to meet with President Hassan Rouhani without any preconditions. Just a week ago Trump threatened on Twitter to unleash severe consequences on Iran.

"The oil market will be watching how this develops, given the amount of uncertainty around Iranian oil supply moving forward, as a result of U.S. sanctions," ING said in a note.

The United States has indicated that it wants Iranian exports to hit zero under the sanctions it pledged to reintroduce in May. These go into full effect in November.

Oil prices are likely to hold fairly steady this year and next as increased output from OPEC and the U.S. meets growing demand led by Asia and helps to offset supply disruptions from Iran and elsewhere, a Reuters poll showed on Tuesday.

Weekly U.S. inventory data is scheduled for release beginning on Tuesday with the American Petroleum Institute (API), an industry group, followed by the U.S. Department of Energy's Energy Information Administration (EIA) on Wednesday.

Six analysts polled ahead of these reports estimated, on average, that crude stocks fell by about 3.2 million barrels in the week ended July 27.

(Additional reporting by Aaron Sheldrick in TOKYO; editing by Jason Neely and Alexander Smith)