Oil drops as dollar gains

Oil fell during the late European and early American sessions as the dollar edged higher and the dollar index marked a fresh three-year high. The U.S. currency tends to trade inversely to raw materials. Strengthening of the greenback reduces commodities appeal as an alternative investment and makes them more expensive for foreign currency holders.

On the new York Mercantile Exchange, WTI crude for August delivery fell to $102.66 a barrel at 14:33 GMT, down 0.47% on the day. Light, sweet crude hit a daily low of $102.39 per barrel around 12:45 GMT, after which a rebound followed. Days high stood at $103.39.

Meanwhile on the ICE, Brent oil August futures fell 0.19% on the day by 14:35 GMT, standing at $107.23 per barrel. Prices held in range between days low of $106.87 and high at $107.53 per barrel.

WTI dropped 0.8% as the dollar index surged, hitting a new three-year high of 84.89. The U.S. currency gauge for September settlement stood at 84.87 at 14:41 GMT, up 0.52% on the day. Days low stood at 84.31. It settled nearly 0.5% lower yesterday but is posting a 0.2% advance this week after gaining 4.5% over the past three weeks.

Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said for Bloomberg: “The dollar is rising and it’s putting pressure on oil. Even though there are casualties in Egypt, things are relatively quiet at the Suez Canal. Shipping is not interrupted.”

Concern over oil supply from the Middle East through the Suez Canal eased as yesterday Egypt’s interim president Adly Mansour sought to dampen further escalation of conflicts by setting a timetable for parliamentary elections within seven months after amendments to the country’s constitution are approved in a referendum.

Meanwhile, Libya’s Sharara oilfield is expected to resume operations after an agreement was reached with the armed group that shut it down in the end of June.

Negative economic data from China also weighed on prices. Today, the National Bureau of Statistics reported higher than expected consumer inflation. China’s annual consumer inflation rose to 2.7% as food costs surged, compared to analysts expectation of a rise to 2.6%. Meanwhile, China’s Producer Price Index (PPI) fell 0.6% in June compared to May and 2.7% on an annual basis. This was above expectations for a 2.6% decrease according to a Bloomberg News survey, posting the worst reading since 2002 and adding another bit to the negative Chinese economic data that has been piling in the last two months.

Oil prices drew support by an expected drop in oil reserves prior to EIAs weekly report on Wednesday. According to a Bloomberg survey, crude oil inventories probably fell by 3.1 million barrels in the week ending July 5. Gasoline stockpiles are expected to have risen by 1 million barrels and distillate fuel reserves should have gained 1 million as well. Refineries probably operated with a 0.25% increased capacity after hitting the highest level of 92.2 since August in the preceding week. The American Petroleum Institutes separate report is scheduled for later today.

Investors are now looking ahead into Fed’s minutes on Wednesday and Ben Bernanke’s statement, which are expected to provide further information about the central bank’s future monetary policy.

Market players are also eyeing upcoming data from China that might show growth is headed to a 23-year low, in line with previous GDP downward revisions. Any signs of expansion or contraction of China’s economy cause fluctuations to oil pricing as the country accounted for 11% of global consumption in 2012.