Oil down nearly 2 percent on surging OPEC output, strong dollar

By Barani Krishnan

NEW YORK (Reuters) - Oil prices fell nearly 2 percent on Monday, snapping two consecutive days of gains, on caution over galloping Middle East crude output and a stronger dollar boosted by speculation of a U.S. rate hike by the year-end.

Iraq, which has exported more crude from its southern ports in August, will continue ramping up output, its oil minister said on Saturday. Top exporter Saudi Arabia has kept output at around record levels this month.

The dollar hit a three-week high against the yen after Federal Reserve Chair Janet Yellen bolstered expectations in a speech on Friday that the central bank would raise interest rates soon. A stronger dollar makes commodities denominated in the greenback less affordable for holders of other currencies.

Focus on surging Middle East production and the strengthening dollar also offset data from energy monitoring service Genscape showing a drawdown of 287,444 barrels at the Cushing, Oklahoma delivery point for U.S. crude futures during the week ended Aug. 26, traders who saw its report said.

Brent crude was down 77 cents, or 1.5 percent, at $49.15 a barrel by 11:15 a.m. EDT (1515 GMT), almost erasing gains from the previous two sessions.

U.S. West Texas Intermediate (WTI) crude futures dropped 80 cents, or 1.7 percent, to $46.84 a barrel after falling more than $1 at the session low.

Oil rallied with few stops from early August until mid last week after hints by Saudi Arabia and fellow members of the Organization of the Petroleum Exporting Countries that they may agree to an output freeze with non-OPEC oil producers at a meeting in Algeria on Sept. 26-28.

"The market is increasingly likely to discount the outcome of the event, given, even in the instance of a freeze being agreed, compliance will be an issue," Barclays said in a report.

Even so, some analysts cautioned investors against taking an outright short position on oil.

"While a price decline into the $45-46 zone is certainly possible, such a price down move would likely elicit even more OPEC hype that could temper or preclude further downside price follow through," said Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates.

"So, while we see high probability of some 80 to 90 percent of a return to $39 WTI, we also feel that achievement of this objective could still be some four to five weeks away".

Despite a rebound this year, oil trades at less than half of mid-2014 peaks above $100 due to glut fears. Ryan Lance, chief executive of U.S. oil company ConocoPhillips, told an industry conference in Norway the oversupply could extend into 2017.

(Additional reporting by Alex Lawler and Karolin Schaps in LONDON and Henning Gloystein in SINGAPORE; Editing by Marguerita Choy and Louise Heavens)