Oil reverses two-day rally, falls near $80

NEW YORK -- Oil prices reversed a two-day rally and fell sharply on Tuesday, driven by a stronger dollar, a lackluster stock market and rising crude supplies.

By late morning, benchmark crude for April delivery fell 81 cents to $81.06 per barrel on the New York Mercantile Exchange. Earlier, oil dropped as low as $80.16. Crude has risen steadily over the last two trading sessions and has gained 18 percent over the past month amid signs the U.S. economy is emerging from last year's recession.

Those gains were trimmed Tuesday as news from Europe and China bolstered the dollar, making crude more expensive for investors holding foreign currencies.

Tradition Energy analyst Addison Armstrong said the dollar strengthened against the euro ahead of talks between President Barack Obama and Prime Minister George Papandreou of Greece, which has been reeling from financial turmoil.

Phil Flynn of PFGBest said reports that China may stop tying its currency to the dollar gave a boost to the greenback, "helping to bring inflated oil back down to earth."

Investors are also awaiting reports from the Energy Information Administration for signs of better oil demand. The EIA releases its monthly short-term energy outlook at noon today. On Wednesday EIA will report its weekly petroleum inventory data. Armstrong expects a sixth consecutive increase in crude stockpiles.

In other Nymex trading, heating oil fell 2.07 cents to $2.0848 a gallon, and gasoline dropped 3.90 cents to $2.2502 a gallon. Natural gas lost 0.8 cent at $4.519 per 1,000 cubic feet.

In London, Brent crude was down 92 cents at $79.53 on the ICE futures exchange.