Oil declined for a second day on Thursday to trade below $86 as a stronger dollar and soaring US crude stockpiles took the steam out of the year's sharpest rally. Resurgent concern about Greece's fiscal crisis has shaken markets from commodities to equities over the past two days, boosting the value of the dollar against the euro and other major currencies as investors seek safer assets.
Front-month US crude rallied to an 18-month intraday peak above $87 on Tuesday after a flurry of positive economic indicators from the world's largest energy user. The contract climbed almost 9 percent in six sessions, before changing direction on Wednesday.
Prices on Thursday fell 29 cents to $85.59 a barrel by 0655 GMT, while London ICE Brent slid 34 cents to $85.25, pulled lower by the tenth consecutive weekly gain in US crude supplies. "The market had a very strong run over the last few days and it's just taking a little bit of a breather because the US dollar went up, equity markets came down and so did crude," said Peter McGuire, managing director of Commodity Warrants Australia in Sydney.
"Then the inventory numbers came out and it was a bit of a wake-up call," he said. "The worries about sovereign debt in Europe are not going away." The dollar climbed more than 0.3 percent against a basket of currencies on Thursday, while the euro was close to this year's low against the US currency. Two top US Federal Reserve officials warned about the risks to the economy from asset bubbles on Wednesday, and one suggested raising interest rates to halt risky behaviour that could trigger another bust.
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