Greenback's rebound pushes oil down

Crude oil fell for a second day after forecasters said Hurricane Dolly would miss fields in the Gulf of Mexico and the dollar rebounded, curbing investments in commodities.

Dolly's likely path towards northern Mexico and southern Texas will avoid the area's oil infrastructure. Gold and corn also fell as signs US interest rates may increase boosted the dollar against the euro.

Gold fell to a one-week low of $937.15 an ounce in London, and corn to $5.8125 a bushel, the lowest since May 30.

"The hope that Hurricane Dolly will miss production facilities and refineries, along with stronger equities and a stronger dollar, has led to the realisation the market will be looser in coming months," said Andy Sommer, an analyst with HSH Nordbank in Hamburg.

Crude oil for September delivery fell as much as $2.18, or 1.7 per cent, to $125.77 a barrel, and traded at $126.11 at 9.58am London time on the New York Mercantile Exchange. Oil futures have declined more than 15 per cent from a record $147.27 a barrel on July 11. The August contract expired yesterday after declining 2.4 per cent to $127.95 a barrel, the lowest settlement since June 5.

"There is a sense of relief from a hurricane track that keeps the Gulf oil production in pretty good shape," said Gerard Burg, energy and minerals economist with National Australia Bank in Melbourne. "We have seen that prices near $150 were near the top of what consumers are willing to accept."

The number of outstanding oil futures in New York dropped to the lowest in 17 months as oil companies, refiners and institutional investors exited the market. Open interest fell 2.6 per cent July 21 to 1.23 million contracts on the Nymex, according to data from the exchange.