Oil sinks to near $81 as dollar gains on euro

Oil prices fell by more than a dollar to near $81 a barrel Wednesday as the American currency continued to strengthen against the euro and a report showed U.S. crude supplies rose more than expected last week.

By early afternoon in Europe, benchmark crude for June delivery was down $1.51 to $81.23 a barrel in electronic trading on the New York Mercantile Exchange.

The June contract fell $3.45, or 4 percent, to settle at $82.74 on Tuesday on investor fears a $144 billion bailout for Greece won't keep the debt crisis from spreading to other European countries.

The dollar kept gaining on the euro, which was down to $1.2923 from $1.3004 late Tuesday in New York. Oil and the dollar often move in opposite directions.

"Given the ongoing appreciation of the dollar and the weak opening of equity markets, oil prices are likely to remain under pressure," said a report from Commerzbank in Frankfurt.

U.S. crude inventories rose 3.0 million barrels last week, the American Petroleum Institute said late Tuesday. Analysts had expected an increase of 1.5 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Inventories of gasoline and distillates also rose, the API said.

"The high gasoline prices ... appear to be putting the brakes on gasoline demand," Commerzbank said. "We are skeptical that the recovery of oil demand expected by the market in the industrialized countries will actually happen at the current price level."

The Energy Department's Energy Information Administration is scheduled to announce its supply report -- the market benchmark -- later Wednesday.

While U.S. supplies remain high and demand weak, analysts said falling prices were still more likely to have been a result of speculative transactions, not a reaction to market fundamentals, "which only seem to be getting worse."

"We would love to be able to point to Tuesday's steep declines as evidence that oil market fundamentals are finally coming home to roost. We believe that the virulence of the selling certainly reflected an element of that" said a report from U.S. energy consultancy Cameron Hanover. "But, the bulk of selling seems to have been connected to a fresh round of risk repudiation that seems to have been tied directly to the Greek bailout -- and its undercurrent of concern for Spain, Portugal and others."

In other Nymex trading in June contracts, heating oil lost 3.30 cents to $2.2265 a gallon, and gasoline slipped 3.42 cents to $2.2880 a gallon. Natural gas fell 1.6 cents to $3.997 per 1,000 cubic feet.

In London, Brent crude was down $1.44 to $84.23 on the ICE futures exchange.