Oil Falls as Market Speculates on Fed Easing Exit

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Brent crude oil futures fell below $104 per barrel on Tuesday in New York, as investors worried that the U.S. Federal Reserve might scale back its bond buying program, which could push the dollar higher and hinder energy demand.

U.S. crude futures were trading more than 1 percent lower as investors watched gasoline prices, which were retreating after a sharp three-session rise last week.

Operations were unaffected at the U.S. crude futures hub in Cushing, Oklahoma, about 77 miles (124 km) northeast of Moore, after a vicious tornado ripped through the area.

Comments by Fed officials and upbeat U.S. data last week fueled speculation that the central bank might start to reduce its bond purchases this year.

Investors are focusing on the release of minutes of the Fed's last meeting and testimony by Fed Chairman Ben Bernanke to Congress, both scheduled for Wednesday.

"The market is waiting to see what is going to happen with monetary policy and at what speed it will change," said Bjarne Schieldrop, head of commodity research at SEB in Oslo.

As the dollar strengthens, crude oil and other commodities priced in the dollar tend to drop as they become more expensive for buyers using other currencies.

The dollar was trading 0.34 percent higher against a basket of currencies.

Front-month Brent futures was down by nearly $1 to trade under $104 per barrel, lower than the $105 area it touched in the previous session, which was its highest since May 7.

U.S. June crude which expires at the end of Tuesday's session, shed 55 cents to trade at $96.

Gasoline futures were trading 1.9 percent lower at $2.85 per gallon. Gasoline rose from $2.77 a gallon last Wednesday to $2.92 by Friday, a premature and overdone move ahead of the U.S. Memorial Day holiday weekend, noted Andy LeBow, vice president at Jefferies Bache.

Memorial Day ushers in summer driving season and peak demand for gasoline in the U.S. Gasoline stocks in PADD 1, the densely-populated U.S. East Coast district, were 13 million barrels above last year, the latest government figures showed last week.

"I think that the product that led us to the upside is now leading us on the downside," LeBow said. "Wednesday's $2.77 low engendered some wholesale buying as we head into Memorial Day."

This week, analysts expect a drop of 400,000 barrels in U.S. crude stockpiles due to higher refinery activity and lower imports, according to a Reuters poll. This could lend support to oil prices.

Lending some support to prices was fear that supply could be disrupted if fighting in the Middle East intensifies.

Reports that Lebanese Hezbollah guerrillas were involved in fierce fighting for Syria's embattled president prompted alarm that the civil war may spread to neighbouring oil producers.

Initial estimates of Purchasing Managers' Indexes (PMIs) are due this week for China, the euro zone and the United States but are unlikely to dispel fears of a sluggish global economic outlook, Reuters polls show.

The spread between U.S. crude oil, also known as WTI, and Brent crude narrowed to its lowest in a week at $7.62 a barrel, and was heading for its lowest close since January 2011.

Analysts saw scope for further tightening in the spread due to an increased ability to move U.S. fuel to the Gulf and East coasts as pipeline and rail infrastructure is built out.