Oil fell below $74 a barrel on Tuesday, down for the first time in six days as Chinese shares plummeted on renewed concerns over the economic recovery, after reaching a 10-month high a day earlier.
Investors are looking to oil inventories in the United States for direction, with analysts calling for a draw in crude and gasoline stocks and an increase in distillates.
U.S. crude futures for October fell 54 cents to $73.83 a barrel by 0645 GMT, after hitting their highest intraday mark since October 21 at $74.81 on Monday. Brent crude lost 57 cents to $73.69.
The drop is probably due to the decline in equities markets today, said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.
People are waiting for (U.S.) inventory numbers too. Market fundamentals are still weak. While crude stocks may have fallen, those for products are still high. The supply-demand balance is weak.
An initial Reuters poll showed crude inventories for the week ended August 21 fell by 900,000 barrels, much smaller than the unexpected 8.4 million-barrel draw in the week before, as imports stayed low and refinery utilization rose.
But forecasters called for a 200,000-barrel rise in distillate stocks, while gasoline inventories could also have eased by 900,000 barrels, as demand may have improved on late summer vacation driving, which would make it the fifth straight week of falls.
Data from the American Petroleum Institute will be released at 2030 GMT on Tuesday, while the U.S. government data is due out on Wednesday.
CHINA LEADS ASIA SHARES LOWER
While the race toward $75 over the past week was spurred by the equities rally, with the Dow Jones index <.DJI> also briefly touching 10-month highs on Monday, oil prices were hit by falling Asian stocks on Tuesday, led by China.
The Shanghai stock index <.SSEC> plunged more than 5 percent after Premier Wen Jiabao said Beijing would keep its monetary policy loose as the economy faces new difficulties, including trouble boosting domestic consumption, while Hong Kong stocks <.HSI> lost almost 2 percent.
Chinese shares extended their fall despite optimistic remarks from a senior government economist who said investors had over-reacted to recent talk of monetary policy fine-tuning and that the sell-off in the stock market would be short-lived as the recovery in China's economy was solid.
Also sounding upbeat, an official with the State Administration of Foreign Exchange said China was likely to see rising capital inflows over the rest of this year as its economy recovers.
Commodities markets have closely tracked equities indexes in recent months, as dealers view stocks as a lead indicator of economic performance.
It is too early to say the economy is on a strong footing and it would take another six months to be sure that the recovery is on track, Astmax's Emori said.
He saw $75 as a key resistance level. Over $75, there is no reason to buy under current fundamentals.
Oil and commodities traders will be keeping their eyes on U.S. housing, consumer confidence and retail sales data due later on Tuesday as pointers to the health of the world's biggest economy.
As Asian shares fell, the dollar eased against the yen as worries returned over the state of U.S. consumer confidence.
(Reporting by Ramthan Hussain; Editing by Clarence Fernandez)