Oil prices fell 2 percent to below $77 per barrel on Tuesday as stock markets slumped and risk appetite dwindled on renewed worries over euro zone debt.
Shanghai's main equities index plunged more than 4 percent, Japan's Nikkei was poised for its worst quarter since October-December 2008 and European stocks lost 1.5 percent in early trade as the dollar rose against the euro.
One supportive factor for oil was removed as forecasts indicated Tropical Storm Alex would skirt the main production region in the U.S. Gulf of Mexico, limiting disruption there to a few precautionary shutdowns.
U.S. crude for August tumbled as much as $1.75 to a low of $76.50 per barrel and was down $1.65 at $76.60 by 0817 GMT, extending Monday's 0.77 percent decline.
Oil is still up almost a fifth from its intra-day low on May 20 below $65 and is about $10 lower than an early-May 19-month peak above $87.
ICE Brent fell $1.60 to $75.99.
Investors were cautious ahead of bank repayments to the European Central Bank. Banks must repay 442 billion euros ($545.5 billion) to the ECB on Thursday, leaving a potential liquidity shortfall in the financial system of over 100 billion euros.
The dollar rose 0.3 percent against a basket of currencies on Tuesday. A stronger dollar makes oil more expensive for many buyers based in other currencies..
It is a return to risk aversion, said Eugen Weinberg, a commodity analyst at Commerzbank in Frankfurt. Gold is outperforming other commodities, a sign of a move to safe havens, and base metals are down on worries over the economy.
The oil market is no longer worried about Tropical Storm Alex as it looks like it will avoid oil facilities, he said.
The U.S. National Hurricane Center forecast that Alex, located about 520 miles southeast of Brownsville, Texas, would make landfall near the Texas-Mexico border early Thursday.
Alex, which was moving slowly north-northwest, is expected to strengthen into the first hurricane of the Atlantic season on Tuesday, the NHC said in latest advisory on Monday.
A tropical storm, where the maximum sustained surface wind speed ranges from 39 to 73 miles or 63 to 118 km per hour (kph), is weaker than a hurricane, where sustained winds are 119 kph or faster.
Shell said it was shutting output from its western and central Gulf of Mexico assets ahead of Alex.
Two of Mexico's three main oil exporting terminals stayed closed on Monday as Alex moved north. The two ports, which ship more than 1.1 million barrels per day (bpd) of Mexican crude, were shut on Sunday as the storm approached.
U.S. oil inventories are higher than normal, potentially buffering the impact of weather-related disruptions on output.
Inventories of distillate fuel, a category that includes heating oil and diesel, probably rose 900,000 barrels last week, according to a Reuters survey on Monday.
Crude stockpiles fell by 1.1 million barrels due to a decline in imports, the preliminary poll showed, while gasoline supplies may have slipped by 400,000 barrels.
Industry group American Petroleum Institute (API) releases inventory data for the week to June 25 on Tuesday at 2030 GMT, followed by government statistics from the Energy Information Administration (EIA) on Wednesday at 1430 GMT.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by Jane Baird )