Oil fell on Tuesday after hitting a 2009 high as bulging oil inventories and falling energy demand outweighed fragile hopes for an economic recovery.

U.S. crude traded down 32 cents to $54.15 a barrel at 1:04 p.m. EDT, after hitting a high for the year of $54.83 a barrel.

London Brent fell 24 cents to $53.34 a barrel.

The slumping economy has battered crude demand, driving up stockpiles and sending prices down from record highs over $147 a barrel struck in July.

Optimism that the recession could be easing has helped lift stock markets in recent weeks, sending the S&P 500 on Monday into positive territory for the year and lending support to crude prices.

Even though oil markets are trading near highs of the year so far, the market still feels nervous about sustaining the highs. Fundamentals still don't justify prices, said Tom Bentz of BNP Paribas Commodity Futures Inc.

U.S. stock markets fell on Tuesday as investors took profits from the recent run up and ahead of government stress test results due later this week.

The dollar rebounded from a one-month low against the euro. <.DXY> A stronger dollar can limit the appeal of oil and other dollar-denominated commodities to some investors.


The drop in demand has swelled U.S. oil inventories to 19-year highs, and analysts polled ahead of weekly data forecast another rise in the week ending May 1.

Crude oil stockpiles rose by 2.2 million barrels, according to the poll, taken ahead of data from the American Petroleum Institute due out later Tuesday and U.S. Energy Information Administration (EIA) to be released on Wednesday.

Distillate inventories were seen rising by 1 million barrels, with gasoline stocks up by 700,000 barrels.

Positive economic signs from large consumers China and India have also helped support oil.

A Chinese manufacturing index based on a poll of industry executives conducted for Hong Kong-based brokerage CLSA rose to a nine-month high of 50.1 in April from 44.8 in March.

India's factory activity expanded in April for the first time in five months, according to the ABN AMRO Bank purchasing managers' index..

(Reporting by Matthew Robinson, Gene Ramos, and Robert Gibbons in New York, Alex Lawler in London; Maryelle Demongeot in Singapore; Editing by Marguerita Choy)