Oil settles down about 1% as traders focus on Ukraine peace talks, Fed policy decision

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Prices likely to hover in near-term tight range, analysts say

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Russia-Ukraine peace talks still in progress

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Investors price in high possibility of Fed rate cut on Wednesday

By Nicole Jao

NEW YORK, Dec 9 (Reuters) - Oil prices edged lower on Tuesday after falling 2% in the previous session, with investors keeping a close eye on peace talks to end Russia's war in Ukraine, concerns about ample supply and a looming decision on U.S. interest rates. Brent crude futures settled down 55 cents, or 0.88%, at $61.94 a barrel. U.S. West Texas Intermediate crude fell 63 cents, or 1.07%, to $58.25 a barrel. Both contracts fell by more than $1 a barrel on Monday after Iraq restored production at Lukoil's West Qurna 2 oilfield, one of the world's largest.

Ukrainian President Volodymyr Zelenskiy's government will share a revised peace plan with the U.S. after talks in London between Zelenskiy and the leaders of France, Germany and Britain.

Peace between Ukraine and Russia could lead to the removal of international sanctions on Russian companies and free up restricted oil supply.

"Many in the market don't feel that Russia is serious about a peace agreement and they're just simply buying time," said Andrew Lipow, president of Lipow Oil Associates. Power on Tuesday was out for roughly half of the residents in the Ukrainian capital Kyiv after the latest Russian attacks on the country's energy system. Aiming to cut Moscow's oil revenue, the Group of Seven countries and the European Union are in talks to replace a price cap on Russian oil exports with a full maritime services ban, sources familiar with the matter said. Oil cargoes at sea, which have increased by 2.5 million barrels every day since mid-August and are still climbing, continue to put pressure on oil prices, said Bjarne Schieldrop, chief commodities analyst at SEB.

"The only reason why Brent crude hasn't fallen faster and deeper is because of the U.S. sanctions related to Rosneft and Lukoil," he said.

FOCUS TURNS TO IEA REPORT, FED DECISION

The next International Energy Agency report should hold clues on the global supply outlook. "The next (market) driver is likely to be the IEA monthly oil market report for December, released on 11 December, which has predicted a record surplus in the oil market in 2026, highlighted in previous outlook reports," said Kelvin Wong, senior market analyst at OANDA.

If the IEA continues to flag surplus risk in the oil market in its December report, WTI crude could drift downwards to test the range support zone at $56.80 to $57.50 a barrel, he added.

U.S. crude inventories fell by 4.78 million barrels last week, while gasoline stocks rose by 7 million barrels and distillate inventories rose by 1.03 million barrels, market sources said, citing American Petroleum Institute figures on Tuesday.

Weekly data from the Energy Information Administration, the statistical arm of the U.S. Department of Energy, will be released on Wednesday. Also on the radar is the Federal Reserve's policy decision on Wednesday, with markets pricing in an 87% probability of a quarter-percentage-point interest rate reduction.

Lower interest rates typically are a positive driver for oil demand given the decrease in borrowing costs, though some analysts were cautious about how much impact this could have on oil prices for now. (Reporting by Nicole Jao in New York, Stephanie Kelly in London, Ashitha Shivaprasad in Bengaluru and Trixie Yap in Singapore; Editing by David Gregorio, Nia Williams and Paul Simao)