Oil falls below $85 on stronger dollar, supplies

By PABLO GORONDI Associated Press Writer

(AP) - Oil prices slumped to below $85 a barrel Tuesday as the dollar strengthened and traders anticipated another increase in U.S. crude supplies from a government report due later this week.

By early afternoon in Europe, benchmark crude for June delivery was down $1.42 to $84.77 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 4 cents to settle at $86.19 on Monday.

Oil touched an 18-month high of $87.15 a barrel Monday, and has jumped about 23 percent since February on investor expectations that a growing U.S. and global economy will boost demand.

But U.S. crude inventories have risen in recent weeks and likely gained another 1.5 million barrels last week, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The Energy Department's Energy Information Administration is scheduled to release last week's supply data Wednesday.

"Crude stocks are expected to rise once again by 1.2 million barrels, which would be the tenth weekly increase in a row," said a report from Commerzbank in Frankfurt. "Inventories are thus high enough to compensate for a temporary interruption of the oil supply" which may be caused by the oil spill in the Gulf of Mexico.

Still, the long-term effects of the spill were "highly uncertain, " said JBC Energy in Vienna.

"In the worst case, an interruption of crude supplies to refineries in (the Gulf area) could have severe consequences for the U.S. domestic product supply and prices," JBC said, noting that the area was responsible for 42 percent of U.S. refining capacity but only 21 percent of product consumption.

Investors are also concerned that higher prices for crude products such as gasoline will eventually undermine economic growth.

"Throughout this move higher, signs that the world economy is recovering have trumped everything else," Cameron Hanover said in a report. "The economy has so far ignored signs that higher oil prices are making it that much harder for the recovery to maintain its pace."

A stronger dollar was also seen behind Tuesday's slide by making crude more expensive for investors holding other currencies.

The euro fell to $1.3097 in European trade Tuesday, down from $1.3212 late Monday in New York, while the British pound dipped to $1.5163 from $1.5258.

In other Nymex trading in June contracts, heating oil fell 2.64 cents to $2.3187 a gallon, and gasoline slid 3.86 cents to $2.3965 a gallon. Natural gas lost 1 cent to $3.99 per 1,000 cubic feet.

In London, Brent crude was down $1.47 cents at $87.47 on the ICE futures exchange.

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Associated Press writer Alex Kennedy in Singapore contributed to this report.