Oil down 1 percent after hitting 2009 lows

By Barani Krishnan

NEW YORK (Reuters) - Oil futures ended lower with Brent down over 1 percent on Tuesday after plumbing near seven-year lows on fears global oil producers will pump even more crude in battle for share in a saturated market.

Both Brent and U.S. crude's West Texas Intermediate (WTI) sunk beneath $40 a barrel in early trade, hitting February 2009 levels and extending Monday's 6 percent rout, before paring losses towards the close.

Brent finished the session down 47 cents at $40.26 per barrel, after a session low at $39.81. WTI settled down 14 cents at $37.51, after sliding to $36.64 earlier.

Both benchmarks cut losses further with WTI turning positive in post-settlement trading after industry group American Petroleum Institute (API) reported U.S. crude stockpiles fell 1.9 million barrels last week, versus a 300,000-barrel build forecast. [API/S] [EIA/S]

The U.S. government will issue official inventory data on Wednesday.

The market had earlier pared losses after some traders and investors cashed in their bearish bets from the past two sessions, fearing volatility ahead.

"Fundamentals remain bleak but the question is also how much more aggressive can sellers be when the downside becomes more limited?" said Pete Donovan, broker at New York's Liquidity Energy.

Jim Ritterbusch of Chicago-based oil consultancy Ritterbusch & Associates said he expected "a near-term price consolidation that could see a lift in WTI values back towards the $42 area by the end of next week."

The selloff in crude extended to ultralow sulphur diesel, also known as heating oil , and gasoline , pushing those refined fuels near seven-year lows.

The API also reported a 5.6 million-barrel build in distillates, which include diesel and heating oil, and 2.7 million-barrel rise in gasoline.

Oil tumbled after Friday's meeting of the Organization of the Petroleum Exporting Countries (OPEC) which all but abandoned price support for crude through production cutting the group once resorted to.

OPEC also failed for the first time in decades to agree to a production ceiling. Instead, its core members, led by top crude exporter Saudi Arabia, appeared to be readying for new battles for share in a market with record stockpiles and consuming about 2 million barrels per day (bpd) above production.

In an indication of market battle, Saudi Arabia was shipping more crude to Asia over the last two months of the year, trade sources said.

On the bullish side, the U.S. government raised its projected decline rate for crude output next year, predicting a 570,000 barrels bpd cut versus a 520,000 bpd reduction a month ago.

Banks such as Goldman Sachs have said oil could fall to $20.

But defiant bullish traders such as Andy Hall were not ready to give up their bets on a faster-than-thought recovery.

"There is certainly still a chance of lower prices in the next month or so," Hall wrote in a Dec. 1 letter to investors in his Astenbeck Capital Management hedge fund, which was headed for its worst year after losing 26 percent through November.

"But weighing that possibility against the virtual inevitability of higher prices down the road leads to a simple conclusion: now is not the time to exit the market," he added in the letter.

(Additional reporting by Dmitry Zhdannikov and Simon Falush in London; Editing by Marguerita Choy)