Oil dives 4% on demand worry, dollar surge

Oil slid more than 4% on Wednesday, as signs of further economic weakness fed demand worries and a rising dollar weighed, triggering technical sell stops and sending US crude to its lowest since February.

US crude weakened early on data showing a rise in core inflation and shrinking New York manufacturing. After a brief rise on news of a big drop in weekly US crude stocks, prices succumbed to intensifying selling pressure, breaking below the

150-day moving average and USD 95 key support.

"It's a rush for the exits. The market has been overvalued for some time now...the Brent market has been a bubble and the bubble is bursting today," said Tim Evans, energy analyst at Citi Futures Perspective.

"In my opinion, WTI would be fairly valued at USD 85 a barrel and Brent at USD 90 a barrel," Evans added.

US July crude fell USD 4.56 to settle at USD 94.81 a barrel, the lowest since Feb. 22. It hit a session low of USD 94.01, also the lowest since that day.

Brent crude for July delivery expired and settled USD 3.06 lower at USD 117.10, after hitting a session low of USD 116.80. The August contract settled down USD 6.34 at $113.01.

Brent's premium against US benchmark West Texas Intermediate for the second-month August contract narrowed by more than USD 1 to around USD 18 a barrel after the July spread had blown out to a record USD 22.80 on Tuesday.

EURO, STOCKS SLUMP

The slump came as the US dollar extended gains for its biggest daily rise since August, with the dollar index up 1.7%, while the S&P 500 stock index tumbled by more than 2.0% to its lowest level since March.

The euro slid against the dollar, heading for its worst day in more than a month on worries about the Greek debt crisis.

European ministers failed on Tuesday to reach agreement on how private holders of Greek debt should share the costs of a new bailout, putting the onus on leaders of Germany and France to forge a deal later this week.

Greek Prime Minister George Papandreou, said he will form a new government on Thursday and seek a vote of confidence from his parliamentary group after street protests against his austerity plans.

The session reminded oil traders of early May, when prices swooned from recent highs. Other commodities also fell, with corn slumping toward its biggest three-day loss in a year and a half. The Reuters-Jefferies CRB index fell 2.3%.

US core consumer inflation rose more than expected in May to post its largest increase in nearly three years, which could prompt the Federal Reserve to increase interest rates sooner rather than later.

A separate report showed manufacturing in New York State unexpectedly shrank for the first time since November, surprising economists who had expected a rise.

KEYSTONE RESTRICTED

Macroeconomic conditions and debt fears overshadowed weekly oil inventory data, which confirmed a much larger than expected decline in stocks due in large part to a reduction in Midwest supplies as a key Canadian pipeline shut down.

Inventories in Cushing may continue to draw after Canada's TransCanada Corp said it was curtailing oil shipments by 11.5% on the 591,000 barrel per day Keystone pipeline this month as it works on the line's facilities following two oil spills last month.

Capacity on the line will be restricted further to between 400,000 and 450,000 bpd in July while the work is going on, it said.