Oil fell on Wednesday, pulling U.S. crude off six-week highs, as the dollar strengthened and investors saw little upside from declining inventories in an environment where anxiety over the euro zone debacle is overshadowing tightening supply.
U.S. crude shed $1.56 to $88.65 a barrel by 0630 GMT (2:30 a.m. ET) after touching $90.52 on Tuesday, the highest intraday price since August 4, while Brent fell 62 cents to $111.27. The dollar climbed about 0.6 percent against a basket of currencies. <.DXY>
Moody's Investors Service on Wednesday downgraded the credit ratings of two of France's top banks, Societe Generale
The euro zone crisis is capping gains in oil prices, said traders including Ken Hasegawa, a commodity derivatives manager at Japan's Newedge brokerage, while forecasters are lowering their demand growth outlooks for this year and next.
Fundamentally, this market should be declining further, Hasegawa said. We are seeing a decline in inventories, but that is not a serious matter, while the financial markets are a very concerning matter. There is no reason for crude to go higher, so we are seeing profit taking.
High pump prices slashed U.S. gasoline consumption and forced cost-conscious motorists off the road this summer, making this driving season the worst for gasoline demand since 2009, MasterCard said on Tuesday.
U.S. crude stockpiles fell a larger-than-expected 5.1 million barrels last week as Tropical Storm Lee disrupted output in the Gulf of Mexico, trade group the American Petroleum Institute reported on Tuesday. Analysts polled by Reuters had projected a 3.1-million-barrel drop.
The inventory drop, related mostly to seasonal weather events, is helping U.S. crude benchmark West Texas Intermediate (WTI) narrow its discount to Brent, which is now trading about $22 higher following a record premium above $27 last week.
Lee shut in nearly 5 million barrels of U.S. oil production from September 3 to 9, according to Reuters estimates based on government data.
Distillates, which include heating oil and diesel, rose 67,000 barrels, compared with analyst forecasts of a 700,000 barrel gain. Only gasoline painted a more bearish picture, with stocks up 2.8 million barrels, compared with analyst projections for a 500,000-barrel drop.
Government statistics on U.S. oil stockpiles and demand from the Energy Information Administration will follow on Wednesday at 1430 GMT.
On a longer-term basis, the grim outlook for the global economy is also weighing on oil prices.
World oil consumption will increase more slowly than expected this year and next as the pace of global economic growth eases, the International Energy Agency (IEA) said on Tuesday.
In its monthly oil market report, the Paris-based agency said financial and economic headwinds were gathering momentum and significant economic threats skewed the demand side risk to the downside.
There is still a lot of uncertainty in Europe and the issue will not be resolved soon, it will continue for the next three to six months, Hasegawa said.
The IEA cut its estimate of global oil demand growth this year by 160,000 barrels per day (bpd) to 1.04 million bpd and trimmed its 2012 demand growth estimate by 190,000 bpd to 1.42 million bpd.
In other markets, European stock index futures fell following an equity sell-off in Asia, where some regional indexes hit lows last plumbed in 2009, on persistent fears that Europe's sovereign debt problems are causing a banking crisis.
The euro zone's troubles -- underscored by the downgrade from Moody's for some French banks -- knocked the single currency lower, while in Asia mutual funds slashed bets on regional currencies to shore up other parts of their portfolios.
(Editing by Clarence Fernandez, Himani Sarkar)