Oil steadies with Ukraine peace talks, US rate decision in spotlight

Oil prices steadied 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 edged 3 cents higher to $62.52 a barrel at 1317 GMT. U.S. West Texas Intermediate crude gained 4 cents at $58.92 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. 

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

"Oil is keeping to a tight trading range until we get a better idea of which way the peace talks will go," KCM Trade chief market analyst Tim Waterer said. 

"If the talks break down, we expect oil to move higher, or if progress is made, and there is a likelihood of Russian supply to the global energy market resuming, prices would be expected to drop," he added.

According to sources familiar with the matter, 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 in a bid to reduce Russia's oil revenue.

Some analysts were watching for clues on supply in the next International Energy Agency report.

FOCUS TURNS TO IEA REPORT, FED DECISION

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

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.

"(Brent) is being pushed towards the $60-line by the booming amount of oil at sea," said SEB's chief commodities analyst Bjarne Schieldrop. "The only reason why Brent crude hasn't fallen faster and deeper is because of the U.S. sanctions related to Rosneft and Lukoil."

Also on the radar is the Federal Reserve's policy decision due on Wednesday, with markets pricing in an 87% probability of a quarter-point 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.

"Although markets are largely invested in upcoming FED policy decision on Wednesday for a possible 25bp cut, something that could lend short-term support at the lower end of the $60–65 band, the broader price structure remains anchored by expectations of an oversupplied 2026 (oil market)," said Phillip Nova's senior market analyst Priyanka Sachdeva.

(Reporting by Stephanie Kelly in London, Ashitha Shivaprasad in Bengaluru and Trixie Yap in Singapore; Editing by Jamie Freed and Bernadette Baum)