Crude oil futures ended lower on Tuesday, falling early as the dollar strengthened, then paring losses as the greenback weakened after a Federal Reserve official said he did not believe the U.S. central bank should pull back on its quantitative easing program.
U.S. crude oil prices were further pressured by sinking gasoline prices. The June U.S. crude contract expired on Tuesday.
St. Louis Federal Reserve Bank President James Bullard, a voting member of the Fed's policy-setting committee this year, said inflation is too low to taper bond purchases.
The Fed is currently buying $85 billion in Treasuries and mortgage-backed securities each month to ease borrowing costs.
Financial markets await Federal Reserve Chairman Ben Bernanke's testimony to Congress at 10 a.m. EDT (1400 GMT) on Wednesday and the release of the Fed's meeting minutes.
Any hint that the Fed will slow the current bond buying policy would boost the dollar.
This would curb oil demand and prices. As the dollar strengthens, crude oil and other commodities priced in the dollar tend to drop as they become more expensive for buyers using other currencies.
Front-month Brent futures ended the session 89 cents lower at $103.91 per barrel, after trading above $105 and to a low of $103.51.
U.S. June crude oil futures expired 55 cents lower at $95.16/bbl after trading between $95.50 and $96.97. July crude futures ended 75 cents lower at $96.18/bbl
Gasoline futures weighed on the entire crude oil complex, ending the day more than 2 percent lower at $2.8458 per gallon, the biggest daily percentage loss since May 1.
Between Wednesday and Friday last week, gasoline rose from $2.77 a gallon to $2.92. That surge, ahead of the U.S. Memorial Day holiday weekend, was premature and overdone, said Andy LeBow, vice president at Jefferies Bache.
Memorial Day ushers in summer driving season and peak demand for gasoline in the United States. Gasoline stocks in PADD 1, the densely-populated U.S. East Coast district, were 13 million barrels above last year, the latest government figures showed last week.
"I think that the product that led us to the upside is now leading us on the downside," LeBow said. "Wednesday's $2.77 low engendered some wholesale buying as we head into Memorial Day."
This week, analysts expect a drop of 800,000 barrels in U.S. crude stockpiles due to higher refinery activity and lower imports, according to a Reuters poll. This could lend support to oil prices.
Operations at the U.S. crude futures hub in Cushing, Oklahoma, about 77 miles (124 km) northeast of Moore, were unaffected after a vicious tornado ripped through the area.
Lending some support to prices was fear that supply could be disrupted if fighting in the Middle East intensifies.
Reports that Lebanese Hezbollah guerrillas were involved in fierce fighting for Syria's embattled president prompted alarm that the civil war may spread to neighbouring oil producers.
Initial estimates of Purchasing Managers' Indexes (PMIs) are due this week for China, the euro zone and the United States but are unlikely to dispel fears of a sluggish global economic outlook, Reuters polls show.
The spread between U.S. crude oil, also known as West Texas Intermediate (WTI), and Brent crude narrowed to its lowest in a week at $7.62 a barrel, but settled at $7.73.
Analysts saw scope for further tightening in the spread due to an increased ability to move U.S. fuel to the Gulf and East coasts as pipeline and rail infrastructure is built out. (Additional reporting by Simon Falush in London, Ramya Venugopal in Chennai, India and Robert Gibbons in New York.; editing by Mark Heinrich and David Gregorio)