Brent crude fell below $107 on Wednesday, after sharp gains a day earlier, weighed down by a stronger dollar as investors sought refuge in the greenback amid lingering concerns over a debt crisis in the euro zone.
Brent futures lost 98 cents to $106.16 a barrel in Singapore trading by 0456 GMT, after falling more than a dollar earlier. U.S. crude shed $1.32 to $83.12 a barrel. Oil prices jumped more than 3% on Tuesday.
The euro zone was back in focus, as doubts remained over the ability of European policy makers to stem a crisis that threatens to trigger a global recession and curtail oil demand.
Plans to increase the financial firepower of the euro zone's 440 bln euro rescue fund face opposition in Germany, while a Financial Times report said that a split had opened up within the currency bloc over the terms of Greece's next bailout.
Commodities also fell after buying to cover short positions, which had boosted prices in the previous session, ended.
"There are still a lot of fears over Europe, and after yesterday's round of short-covering the upside for oil is limited," said Ken Hasegawa, a commodities derivatives manager with Newedge Brokerage in Tokyo.
The U.S. dollar gained 0.4% against a basket of currencies, snapping two sessions of losses, as investors retreated from riskier assets in favour of the safe haven currency.
Brent is expected to face resistance at $107.05, while the resistance for U.S. crude stands at $85.40 per barrel, according to Reuters market analyst Wang Tao.
Brent is poised to fall 5.5% in the third quarter, its second straight quarterly decline, and the steepest since the second quarter of 2010. U.S. crude is set to lose almost 13% this quarter, also a second consecutive loss and its largest drop since the fourth quarter of 2008.
OIL OUTPERFORMS
Oil has fared better than commodities such as copper and gold in the recent sell-off due to tight supplies in the physical market, analysts said.
"We would highlight that because of that very tightness in the physical markets, oil prices have held up far better than other commodity markets and we expect that outperformance to continue," said Barclays Capital in a research note.
Royal Dutch Shell recently shut in 25,000 bpd of oil production in Nigeria, while Libyan crude production has yet to reach the market.
A sharp rise in U.S. gasoline inventories weighed on sentiment, with industry data showing a steep 4.6 mln barrel rise last week, far above the 1-mln-barrel gain expected by analysts.
Crude stocks rose by 568,000 barrels in the week to September 23, the American Petroleum Institute said on Tuesday. Analysts polled by Reuters had projected an 800,000-barrel rise on average.
The market will be next be looking for data from the U.S. Energy Information Administration, due out later on Wednesday.
