Oil prices drop 3 percent as investors retreat from overnight gains

Both Brent and U.S. crude prices dropped nearly $2 a barrel shortly after trading in Brent started on Tuesday before recovering later in the session.

"A lot of the fall was due to short covering," said Ben Le Brun, market analyst at Sydney's OptionsXpress. "There could be a bit of profit taking for people who have gone long," he added.

The falls also indicated investors may have "gone overboard" in pushing up prices so fast, Le Brun said.

U.S. crude, also known as West Texas Intermediate, climbed 27.5 percent by the end of the previous session after three days of gains, the largest three-day increase in dollar terms since February 2011 and the biggest percentage increase since August 1990.

The surge was fueled by an OPEC commentary saying the cartel was willing to talk to other producers to achieve reasonable oil prices, as well as by the downward revision of U.S. output data by the U.S. Energy Information Administration (EIA).

"(The OPEC comments) could be just a bit of politicking given the strategy to date looked to be all about market share," ANZ said in a market report on Tuesday.

"But it does suggest that many producers are likely to be hurting at these levels."

Revised EIA data published on Monday showed U.S. domestic oil production peaked at just above 9.6 million barrels per day (bpd) in April before falling by more than 300,000 bpd over the following two months.

U.S. commercial crude stocks fell by 1.5 million barrels to 449.3 million barrels last week, according to a Reuters poll of analysts on Monday taken ahead of U.S. industry and government data.

Despite the fall in U.S. production the global oil market is still over supplied with oil and a decline in U.S. production is increasingly likely in 2016, Morgan Stanley said in a report on Tuesday.

Brent crude for October delivery had dropped $1.47 to $52.68 a barrel, or 2.7 percent, as of 0226 GMT after climbing $4.10, or 8.2 percent, in the previous session. It dropped by $1.99 a barrel earlier in the session.

U.S. crude for October delivery dropped $1.49, or 3 percent, to $47.71 a barrel, after it settled up $3.98, or 8.8 percent in the previous session. It earlier dropped by $1.97 a barrel.

Investors will be watching key U.S. data, including oil stocks, manufacturing and vehicle sales figures, later on Tuesday to give further direction to prices.