Oil prices dropped more than 2 percent on Tuesday as an interest rate increase by India added to concerns about demand and gains in the dollar helped spark a technical sell-off. Brent crude broke under its 20-day moving average for the first time since November, sparking technical selling as the dollar rebounded and briefly turned higher against the euro.
The dollar index, which tracks the greenback against a basket of currencies, seesawed as it tried to recover from a three-year low and its late strength weighed on oil. "The slide in oil has come in response to equities losses and the dollar entering positive territory," said Matt Smith of Summit Energy in Louisville, Kentucky.
"There was a bit of euphoria in equities markets yesterday following (Osama) bin Laden's death. Today the focus has returned to risk aversion and the economy." Oil's negative correlation with the dollar - a trade in which investors shift cash between the greenback, crude and other commodities as risk aversion rises and falls - hit the highest level since late November.
Brent crude for June fell $2.67 to settle at $122.45 a barrel. US crude for June dropped $2.47 to settle at $111.05 a barrel. Both contracts posted the biggest two-day percentage declines since April 12. Oil's late slide added to earlier losses sparked as India's central bank raised interest rates more than expected, which could curb demand growth.
"There are concerns that higher interest rates could be a growth killer and that could be what is weighing down oil prices. India is one of the biggest emerging economies where a lot of global growth will come from," said Michael Hewson, an analyst at CMC Markets.
Brent trading volumes rebounded after being dampened by a holiday in Britain. US trading volumes were on pace to total about half a million lots, near the 30-day average. Traders also eyed news that China's state oil giants PetroChina and Sinopec had asked the government to cut a fuel consumption tax to reduce their refining losses.
China, the world's No 2 oil consumer, has recently taken action, including raising interest rates and bank reserve requirements, to try to slow inflation and cool its economy. Investors awaited weekly US inventory data, which was expected to show US crude oil stockpiles rose last week with imports outpacing refinery demand, according to a Reuters survey of analysts.
Gasoline stockpiles were also seen rising last week after 10 straight weeks of declines in government data, with traders closely watching for further signs of demand slowing due to rising prices. The industry group American Petroleum Institute's report is due at 4:30 pm EDT (2030 GMT) on Tuesday. The US Energy Information Administration's report follows on Wednesday. Gasoline prices hit $3.96 a gallon, up 8.4 cents in the latest week, according to the Energy Department. Weekly data from MasterCard Advisors' SpendingPulse report showed demand dipped 0.6 percent from year-ago levels last week.
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