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By Timothy Puko 

Government forecasters lowered their estimates for oil prices and oil traders sold off Wednesday despite further signs that the collapse of crude prices is putting long-term pressure on the U.S. oil boom.

The country's oil production fell to a nearly one-year low and is likely to keep falling for months longer than expected, until next September, the U.S. Energy Information Administration said in its monthly short-term forecast. Drilling has become unprofitable now that crude prices have fallen by more than half since 2014's peak, the agency said.

But for any cut coming from the U.S. and many other nations around the world, the Organization of the Petroleum Exporting Countries will fill the void, EIA said. It raised its expectations for OPEC production, keeping world production virtually unchanged through next year. It is the latest sign that there is no end for a year-long battle to keep customers by flooding them with cheap crude.

Those same concerns weighed on oil prices Wednesday as they have since last summer. Light, sweet crude for October delivery lost $1.79, or 3.9%, to $44.15 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell $1.94, or 3.9%, to $47.58 a barrel on ICE Futures Europe. Both hit their lowest settlement since Aug. 27 and are down 59% from their highs in June of 2014.

"I don't see anything new--but just maybe a realization that the fundamentals aren't turning around real fast," said Kyle Cooper, managing director of research at IAF Advisors, a Houston consulting firm. "It's still very well supplied.

"EIA left global supply virtually unchanged at 96.5 million barrels a day for 2015 and 97.3 million for next year.

The strong supply led it to cut its price forecast for both U.S. and global crude benchmarks. The agency said U.S. crude would average $53.57 a barrel in 2016, down 1.6% from its previous forecast. The U.S. price averaged $93.17 a barrel in 2014.

Brent will average $58.57 a barrel in 2016, EIA said, trimming 1.4% from the previous forecast. In 2014 Brent averaged $98.89 a barrel.

U.S. output is down just about 5% from its April peak despite that collapse. Output averaged 9.6 million barrels a day at its peak in April, the highest level since 1971, and has steadily declined since then to 9.1 million, the lowest since September 2014. Production fell by 140,000 barrels a day in August from the prior month.

That wasn't enough to move the market, as prices held steady in the early afternoon and fell sharply ahead of the close. Several recent big swings came largely from speculation about how producers and consumers will respond to prices that have fallen by more than half since last year. It will take tangible proof of a tightening market for any sustained rally, brokers said.

"The market wants to see the actual weekly data (on inventory) instead of what the EIA forecasts," said Scott Shelton, broker at ICAP PLC.

Traders have been fixated on China in recent months as worries about an economic slowdown in the world's second-biggest economy spilled over into crude and other commodities.

Markets got a boost early Wednesday after China's Ministry of Finance said that it would roll out a "more forceful" fiscal policy to stimulate economic growth, such as allocating more funds for infrastructure projects and tax cuts for small businesses.

But after rising by more than 1%, prices spent most of the day in retreat. With OPEC producing above its target of 30 million barrels a day, investors say other production needs to fall to make the market less oversupplied.

That process is likely to go on for six months longer than EIA recently expected, its new forecast shows. It had expected output to recover in before the spring, but now expects it to keep falling until it hits 8.6 million barrels a day in August 2016. It lowered its output expectations for both 2015 and 2016 by about 1.5%, to 9.2 million barrels a day this year and 8.8 million barrels a day next year.

Saudi Arabia's crude oil output did slip in August by around 100,000 barrels a day to 10.26 million, an industry official said Wednesday. That is still close to the record level of 10.3 million barrels a day it hit in July. The amount of crude oil the country sent to export and domestic markets also fell by around 80,000 barrels a day from July, according to the official.

"Any lasting price recovery would require signs that the oversupply is being reduced," analysts at Commerzbank said in a report.

The American Petroleum Institute, an industry group, said late Wednesday that its own data for the same week showed an increase of 2.1 million barrels in crude-oil supplies, according to sources. The group said that gasoline supplies rose by 700,000 barrels and that U.S. distillate stocks increased by 800,000 barrels in the week, according to a sources.

In refined products, gasoline futures fell 4.24 cents, or 3%, to $1.3597 a gallon, and diesel future fell 5.52 cents, or 3.5%, to $1.5386 a gallon.

Georgi Kantchev and Summer Said contributed to this article

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

September 09, 2015 17:21 ET (21:21 GMT)

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