Oil falls to three-month low of $118

Oil fell to $118 a barrel on Tuesday, a three-month low, as investors focused on rising OPEC supply and declining demand in the United States and Europe.

The loss extends a slide from the July 11 record high of $147.27 a barrel and comes despite a storm in the Gulf of Mexico that is curbing oil output and tension over Iran's nuclear programme.

U.S. crude was down $2.70 at $118.71 a barrel by 0852 GMT and fell as far as $118.00, the lowest price since May 5. London Brent crude shed $2.82 to $117.86.

Tropical Storm Edouard, the fifth tropical storm of the 2008 Atlantic hurricane season, has curbed oil production, shipping and refining. But traders were discounting the risk of wider disruption to oil facilities.

"It seems that the market is losing interest in geopolitical and weather-induced 'props', and instead is becoming more aware of growing supply/demand imbalances," said Edward Meir, analyst at MF Global, in a report.

Monday's losses came after Reuters survey showed OPEC oil supply rose for a third consecutive month in July mainly because of increased output from the world's top exporter Saudi Arabia.

The boost in production from OPEC, source of two in every five barrels, coincides with soaring energy prices and an economic slowdown that has eroded consumption in the United States and Europe.

Investors await the outcome of a Federal Reserve meeting later in the day. The Fed is expected to leave its benchmark interest rate at 2.0 percent as it faces higher inflation risks and threats to economic growth.

Tension between major oil exporter Iran and the West over Tehran's nuclear work, and supply losses and violence in Africa's top producer Nigeria, provided support for oil prices.

Iran has handed European Union officials its written reply to a proposal backed by six world powers aimed at defusing a row over the nuclear programme, Iran's Fars News Agency said on Tuesday