Crude Oil falls as economic fears overshadow Saudi Arabia's output cut

By Rowena Edwards

LONDON (Reuters) -Oil prices tumbled more than $1 a barrel on Tuesday, after a strong rally in the previous session as worries about global economic growth outweighed Saudi Arabia's pledge to deepen output cuts.

Brent crude futures were down $1.50, or 1.96%, to $75.21 a barrel by 1046 GMT. U.S. West Texas Intermediate crude fell $1.47, or 2.04%, to $70.68 a barrel.

Brent had gained as much as $2.60 per barrel on Monday and WTI as much as $3.30 after Saudi Arabia, the world's top exporter, said at the weekend its output would drop by 1 million barrels per day (bpd) to 9 million bpd in July.

But weaker demand, stronger non-OPEC supply, potential recessions in the U.S. and Europe, and lower growth in China means Saudi's cut is unlikely to underpin a "sustainable price increase" into the high $80s-low $90s, Citi analysts said in a note on Tuesday.

Backwardation in Brent crude oil futures - where the current value is higher than in later months - steepened after the weekend announcement with the six-month spread hitting a five-week high of $2.20/bbl on Monday.

It fell to around $1.96/bbl on Tuesday.

"The market remains focused on the risk to demand with recession concerns mounted on a broad-based miss in U.S. services PMI giving room for a Fed pause on rates," said Ole Hansen, head of commodity strategy at Saxo Bank.

The U.S. services sector barely grew in May as new orders slowed, and market participants are waiting to see if the U.S. Federal Reserve will hike or hold interest rates in June.

Higher interest rates could curb energy demand.

The mood was further dented by data that showed German industrial orders fell unexpectedly in April.

"If upcoming economic data suggests entrenched inflationary pressure and investors bet on further hikes in interest rates, demand predictions could be revised downwards, effectively neutralising the ostensibly bullish impact of the latest (OPEC+) output decision," Tamas Varga of brokerage PVM said.

The U.S. Energy Information Administration (EIA) is due to release its short-term energy outlook on Tuesday afternoon, while China's May trade data on Wednesday will give fresh demand indications for the world's second-largest oil consumer.

(Reporting by Rowena Edwards in London, Additional reporting by Arathy Somasekhar in Houston and Trixie Yap in Singapore; editing by Sriraj Kalluvila and Jason Neely)