By 0705 GMT, September New York Mercantile Exchange (NYMEX) crude futures were last traded at $28.82 a barrel, down nine cents.The market fell by a hefty $1.05 a barrel to settle at $28.91 a barrel in New York on Monday, after surging past the $30 mark in earlier trade.Oil was falling because the near $2 a barrel rally of last week was unsupported by fundamentals, dealers said.

The market was excited last week by reports of an unusual nine to 10 million barrels dip in U.S. weekly crude inventories, but oil supplies were still seen ample. Dealers said the inventory fall could be just a temporary blip, and expected the latest American Petroleum Institute (API) report, due to be released late Tuesday, to show a stock rise.

The producer cartel Organisation of Petroleum Exporting Countries (OPEC) was also keen to keep current lower oil prices."It is good because prices have stabilised between $22 and $28 a barrel," OPEC president Ali Rodriguez said on Tuesday.

Rodriguez told Reuters by telephone from Saudi where he was visiting as part of a Venezuelan presidential delegation to promote the September OPEC summit. Rodriguez said he was not worried by reports of overproduction by top OPEC member Saudi Arabia.

Industry sources said last month that Saudi had plans to hike output by around 500,000 barrels-per-day (bpd), even after failing to get others from the cartel to join in. Saudi has neither confirmed nor denied the news.Sources said that Saudi has already put 250,000 bpd of extra oil out in July.But last week, the kingdom was said to have stalled a plan for the same amount of hike in August, as prices collapsed. Riyadh's move came after overheated oil prices failed to cool off even after OPEC agreed in late June to an output hike of 708,000 bpd from July.

This was its second output hike for the year. Neither oil producers nor consumers were seen comfortable with U.S. oil prices which hovered around $32 a barrel a month ago at near nine-year high levels.