US oil settles down 79 cents, or 2.15%, at $35.97 a barrel

Oil prices fell about 2 percent towards its 11-year low on Tuesday, as traders shrugged off growing tensions between two of the world's biggest oil producers, and focused instead on a stronger U.S. dollar and swelling U.S. crude inventories.

The U.S. dollar hit a one-month high against a basket of currencies, rising nearly 0.6 percent by midday as traders sought safety over concerns about sluggish global growth and losses in the Chinese stock market

An expected build in crude inventories at Cushing, Oklahoma, the delivery point of the NYMEX futures contract, also weighed on prices. The American Petroleum Institute will release its inventory data at 4:30 p.m. EDT (2130 GMT).

Global marker Brent crude prices were down 80 cents at $36.42 a barrel. Prices hit an 11-year low of $35.98 a barrel just before Christmas, capping a year where the benchmark's value dropped by more than a third.

U.S. West Texas Intermediate (WTI) crude settled down 79 cents, or 2.15 percent, at $35.97 a barrel.

The oil market largely shrugged off rising political tensions in the Middle East between Saudi Arabia and Iran. Analysts said that as long as the conflict did not affect oil production in the region it would not have a consequence for oil prices.

The fundamental picture globally, however, appears to be grim, analysts say.

"The markets keep falling because globally, we're still oversupplied," said Carl Larry, an analyst with Frost & Sullivan. "But, the Middle East tensions still have people scared and they're not sure if they should continue going in and selling. Prices could jump very quickly."

A Reuters survey found that OPEC oil output fell in December, led by lower supply from Iraq. Yet, OPEC production was pumping close to record amounts, signalling few signs that producing members were choosing to reign in output that has pushed prices to 11-year lows.

The collapse in relations between Saudi Arabia and Iran appeared to exacerbate oversupply concerns, as it puts an end to speculation that OPEC could somehow manage to agree on a curb to put in the near term, sources said.

Even so, Iran said it was prepared to moderate its output and exports, once sanctions are lifted, to avoid pressuring prices, a senior National Iranian Oil official said.

Chinese stock markets fell again on Tuesday after a 7 percent dive on Monday, rattling markets worldwide and prompting action from the central bank and stock market regulator.