* Fund selling hits a number of commodities
* Saudi Arabia to produce more crude in Q2-sources
* West to make "substantial and serious" offer to Iran
* API reports 3 million barrel rise in US crude stocks
* Coming Up: EIA oil stocks data 11 a.m. EST Thursday (New throughout, adds hedge fund position data, API)
By Robert Gibbons
NEW YORK, Feb 20 (Reuters) - Crude oil posted its biggest daily fall so far in 2013 on Wednesday, joining a sell-off in precious metals and copper as market rumors circulated that a hedge fund was forced to liquidate substantial commodity positions.
Oil entered into a steep decline just before 11 a.m. EST ( 1700 GMT), diving more than $2 per barrel over 20 minutes with several volumes spikes. Traders cited rumors that a hedge fund was in trouble and said the price fall looked like multiple sell-stop orders being triggered in quick succession.
Expectations that Saudi Arabia intends to raise production in the second quarter added pressure, while a Western diplomat said major powers are ready to make "a substantial and serious offer" to Iran during talks on its nuclear program next week.
"It's called long liquidation out of what had become a crowded trade," said Tim Evans, energy futures specialist at Citi Futures Perspective in New York.
Hedge funds and other large speculators have nearly doubled their bets that oil prices will rise since mid-December, and have amassed positions in Brent and U.S. crude oil futures and options equivalent to around 440 million barrels of oil, regulatory and exchange data shows. Reuters was unable to confirm that any commodity fund was in trouble on Wednesday.
Brent crude oil had risen by $10 a barrel in the first six weeks of 2013 to hit a nine-month peak above $119 a barrel on Feb. 8, as strong demand from China and lower supplies from Saudi Arabia tightened markets.
Prices have eased this week after oil industry sources said Saudi Arabia, the world's top crude oil exporter, expects to lift output in the second quarter, although the size of the production boost was not specified.
On Wednesday, Brent crude for April delivery fell $1.92 to settle at $115.60 a barrel. Prices slipped further to a low of $115.02 in post-settlement trading.
Equity markets also fell sharply on Wednesday after minutes from the U.S. Federal Reserve suggested the central bank may slow or stop buying assets sooner than expected. The S&P 500 posted its worst daily percentage decline since mid-November, losing more than 1 percent.
The U.S. crude contract for March delivery, which expired on Wednesday, fell $2.20, to settle at $94.46 a barrel. U.S. April crude fell $1.88 to settle at $95.22 a barrel, having slumped as low as $94.21.
U.S. benchmark gasoline futures fell more than 6 cents to $3.0595 a gallon while heating oil fell 2.43 cents to settle at $3.1563 a gallon.
Precious metals faltered, with gold hitting a seven-month low below $1,560 an ounce and platinum, palladium and silver falling more than 3 percent. Copper prices fell to their lowest in more than a month.
Supply also is rising in the United States, where the weekly oil inventory report from industry body the American Petroleum Institute showed crude inventories rose 3 million barrels last week.
That included a large 546,000 barrel increase at storage tanks in Cushing, Oklahoma, delivery point of the U.S. benchmark future.
Gasoline and distillate stocks, which include diesel and heating oil, fell by 122,000 barrels and 1.6 million barrels respectively.
Expectations that a crude supply glut in the U.S. Midwest could persist were reinforced by news on Tuesday that the throughput on the Seaway crude oil pipeline from Oklahoma to the Gulf Coast will remain below its 400,000-bpd capacity through May.
On Thursday the U.S. Energy Information Administration publishes its report on U.S. oil inventories at 11 a.m. EST. The report was delayed by a day due to a holiday in the United States on Monday. (Additional reporting by Eileen Houlihan and Cezary Podkul in New York, Simon Falush and Dasha Afanasieva in London and Florence Tan in Singapore; Editing by Bob Burgdorfer and David Gregorio)