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Oil prices fell 2.5 percent on Tuesday, reversing direction after Monday's dramatic rally as dealers focused on slowing global energy demand and doubts over a US plan to rescue the financial sector.
A rebound in the US dollar added to weakness across commodities markets, continuing a strong negative correlation between the greenback and commodities that has been in place for several months. US crude for November dropped $2.76 to $106.61 a barrel by 1703 GMT, after rising nearly $7 on Monday. November Brent crude traded down $3.71 at $102.33.
The losses followed a record surge of nearly 16 percent in the now-expired US October crude contract on Monday. The US Commodity Futures Trading Commission said it was reviewing the price jump to ensure trading was valid. Dealers said Monday's price surge was supported by a weak dollar plus hopes the $700 billion US bailout plan would ease the global financial crisis and support demand in the world's top energy consumer.
But concerns political resistance could delay the rescue package weighed on global markets on Tuesday. "It started off with a wave of optimism and now perhaps a bit of realism has kicked in," said Christopher Bellew, a broker at Bache Commodities. US Treasury Secretary Henry Paulson urged Congress not to weigh down the proposed financial system bailout with unrelated provisions.
After hitting a record high of $147.27 a barrel in July, oil dropped to around $91 a barrel last week on mounting evidence that high energy costs and slowing economic growth were having an impact on fuel demand in large consuming nations. US oil consumption is running about 4 percent below last year, according to the latest government data.
But prices have rebounded after Hurricane Ike battered US oil infrastructure this month. Nearly 70 percent of production remains closed in the Gulf of Mexico, home to a quarter of US output. A Reuters poll of analysts ahead of weekly US government inventory data due on Wednesday forecast that crude stocks fell by 2.0 million barrels last week due to disruptions caused by Ike.
Distillate stocks were forecast to have fallen by 1.5 million barrels, with gasoline stocks expected to have dropped by 4 million barrels after Ike shut Gulf Coast refineries.
News that Saudi Arabia cut supplies to oil companies, reported by Reuters on Monday, as well as unrest in Nigeria and higher-than-expected Chinese imports, also supported prices. The BP Plc-led Baku-Tbilisi-Ceyhan (BTC) oil pipeline has shut down for a short period of planned maintenance, BP said, but exports will not be affected.

Copyright Reuters, 2008

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