Oil prices fell more than 2 percent on Thursday to below $89 a barrel as a stronger dollar and weaker U.S. equities deterred buyers.
Oil markets weakened as Wall Street dipped on disappointing retail sales, placing more caution on oil investors anxious to see if recent positive economic reports could translate into more consumer demand.
Weekly jobless benefit claims rose more than expected, denting optimism sparked on Tuesday by data showing unexpectedly big gains in private sector jobs.
U.S. crude for February delivery was down $1.76 at $88.54 a barrel at 12:50 p.m. EST in heavy volume for a second straight day. In London, Brent crude for February was down $1.20 at $94.30.
Brent's premium over U.S. crude has blown up to as much as $6.55, the highest since May 13, 2010 and threatening to further soar toward a 10-month high of $8.73 reached in February 2009.
Brent's strength has been spurred by continued strong Asian demand while U.S. crude has been pressured by an extended build in stockpiles at the key delivery hub in Cushing, Oklahoma, despite national stocks having fallen in the last five consecutive weeks.
Concerns about the eurozone economy have undermined the single European currency, which fell 1 percent to a five-week low against the dollar on Thursday, as recent signs of the U.S. recovery moving at a faster pace sparked fresh optimism.
By midday, the U.S. dollar was up 0.62 percent against a basket of currencies.
"It's all about the dollar strength and if the dollar keeps rising you could see more profit-taking up here at these levels," said Richard Ilczyszyn senior market strategist at Lind-Waldock in Chicago.
Dollar-denominated commodities become more or less expensive for non-dollar buyers depending on the relative strength of the U.S. currency.
U.S. claims for unemployment benefits rose more than expected last week, adding to bearish sentiment, even though the four-week average, considered a better gauge of underlying labor trends, declined to a 2-1/2 year low.
In the face of this, commodities and financial markets were cautious ahead of Friday's U.S. employment report for December, which is expected to show that nonfarm payrolls jumped 175,000 after November's small gain of just 39,000.
Expectations of economic recovery and with it rising fuel demand helped to drive U.S. oil to a 27-month high of $92.58 on Tuesday, but in volatile trade, prices fell to a low of $87.85 on Thursday.
Analysts said there could be some price distortion this week as the big investment indexes rebalance their crude futures weightings.
"The rebalancing period is well flagged and as such, some of the recent moves in the market are likely to reflect the anticipated rebalancing to some extent," said James Zhang, an analyst at Standard Bank Commodities Research.
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