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Tue 16 Nov 2010 09:37 AM

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Oil falls below $85 on stronger US dollar

Dollar's climb to six-week high pressures oil, crude down nearly 5% since last week's 25-month high

Oil falls below $85 on stronger US dollar
(Getty Images)

Oil
prices eased below $85 on Tuesday, weighed down by a stronger dollar and an
expected rise in US crude stockpiles. US crude for December slipped 35 cents
to $84.51 a barrel by 0421 GMT, extending losses from the previous session. ICE
Brent fell 26 cents to $86.50.

"Oil
had a strong rally recently and the market was really set up for a correction,
with the value of the dollar having quite a lot to do with this," said
Victor Shum, an analyst with energy consultancy Purvin & Gertz.

"Oil
will continue to follow financial markets for day-to-day direction," he
said, adding that prices should hover between $80 and $85 in the near term.

The
dollar hit a six-week high against the euro, following a jump in US Treasury
yields and worries over fiscal troubles in Ireland and Portugal.

The
10-year U.S. Treasury yield soared 17 basis points on Monday for its biggest
one-day rise since June 2009, giving a broad lift to the greenback.

A
stronger dollar can weigh on oil prices because it attracts investors away from
dollar-denominated crude by making oil more expensive for users of other
currencies.

Crude
has fallen nearly 5 percent since hitting a 25-month peak of $88.63 last week.
Oil's recent sell-off was sparked by fears that China may raise interest rates
to slow its economy.

Industry
group the American Petroleum Institute will issue its latest U.S. crude oil
inventory data later on Tuesday. Analysts expect crude stockpiles in the
world's largest energy consumer to have edged up last week, following a surprisingly
large drawdown the week before. [EIA/S]

"This
week's U.S. oil market data will be particularly important as market
participants will be looking for a confirmation of recent inventory drawdowns
coupled with improving demand conditions," said Stefan Graber, an oil analyst
with Credit Suisse.

Crude
stockpiles were seen rising 400,000 barrels, while distillates were expected to
fall 1.6 million barrels, a Reuters poll showed.