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Oil pares early gains on bearish world market outlook

A woman pumps gas at a station in Falls Church, Virginia December 16, 2014. REUTERS/Kevin Lamarque

By Koustav Samanta

NEW YORK (Reuters) - Oil prices pared most of their gains on Tuesday afternoon as investors focussed on a bearish outlook from the International Energy Agency after U.S. crude gained on technical support earlier in the session.

Brent futures for November delivery rose 27 cents to $50.13 a barrel, a 0.5 percent gain, by 1:20 p.m. ET (1720 GMT). U.S. crude was up 52 cents or 1.1 percent at $47.62 per barrel, paring early gains of over a dollar on technical trade.

The IEA said the world oil market would remain oversupplied for at least another year despite falls in output from non-OPEC producers.

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"(Monday's) sharp drop lower is being deemed an overreaction," said energy analyst Tony Headrick of Minnesota-based commodity brokerage CHS Hedging. Oil fell 5 percent on Monday as traders took profits after last week's surge to an 11-week high.

Traders also noted that a weaker U.S. dollar, which hit a three-week low on Tuesday, added some support to the higher crude prices.

"There is some uncertainty in the trading markets about the direction of the U.S. dollar, with some trading action in oil reflecting hopes that the U.S. dollar declines further," said Richard Hastings, macro strategist at Seaport Global Securities.

The focus of the market is slowly moving away from the existing glut to possible future tightening and a potential price spike, analysts at Energy Aspects said.

"Rightly so, in our view, given accelerated declines in U.S. output have kick-started the rebalancing process," Energy Aspects analysts Amrita Sen and Robert Campbell said in a note.

Oil’s recent sharp price recovery is eerily like the bounce seen late last winter, said Edward Morse, global head of commodities research at Citi in New York.

"Both followed a period of price stability following a sharp decline. Both appear to be spurred on by unverifiable assumptions surrounding single data points. Both are driven by sentiment and financial flows rather than clear market fundamentals," Morse added.

Investors awaited data on U.S. oil inventories from the American Petroleum Institute (API) on Wednesday and the Energy Information Administration (EIA) on Thursday. Release of the data was delayed a day because of the U.S. Columbus Day holiday.

A Reuters survey estimated that U.S. crude stockpiles increased by 2.8 million barrels on average in the week ended Oct. 9. [API/S] [EIA/S]

(Additional reporting by Scott Disavino in New York, Christopher Johnson in London and Meeyoung Cho in Seoul; Editing by Chris Reese and Dan Grebler)