Oil prices fell Tuesday, with Brent losing nearly 2 per cent, as the dollar rallied and glut worries grew amid forecasts for higher U.S. crude stockpiles and Iran's remark that it was on target to reach peak production.

News that energy companies in the U.S. Gulf of Mexico had shut some 22 per cent of crude oil equivalent output as a precaution to threats from a tropical storm limited some of the downside in crude prices.

Brent crude futures settled down 89 cents, or 1.8 per cent, at US$48.37 per barrel.

U.S. West Texas Intermediate (WTI) crude futures fell 63 cents, or 1.3 per cent, to close at $46.35.

It was a second straight day that oil slid on worries of oversupply and a strong dollar, adding to Monday's drop of more than 1 per cent in Brent and WTI.

"Today is just another economic story that's fed the dollar's strength and with the weekly build expected in U.S. crude, prices are getting a double whammy," said Tariq Zahir, a trader in WTI timespreads at Tyche Capital Advisors in New York.

"Yes, we have storm concerns but they are not really affecting production as much as the market bulls would like."

The dollar index, which measures the greenback against a basket of currencies, hit session peaks after the U.S. Consumer Expectations Index rose to October highs.

The dollar has rallied since Friday, after Federal Reserve Chair Janet Yellen raised expectations for a U.S. rate hike in a policy speech. A stronger greenback tends to make dollar-denominated commodities such as oil costlier for holders of other currencies.

Analysts said U.S. crude stockpiles likely rose by almost 1 million barrels last week, the second straight weekly build, as the peak summer period for U.S. driving and gasoline consumption winds down.

An Iranian government official said at an oil industry conference in Norway that Tehran's production was expected to hit 4 million barrels per day by year end. Iran was producing that much before Western sanctions reduced its exports.

Oil rallied about 20 per cent earlier this month, after the Organization of the Petroleum Exporting Countries said it was working with non-OPEC members to reach a production freeze. Iraq said on Tuesday it was committed to freezing output when OPEC meets informally for talks with other producers in Alegria next month.