Oil prices drop towards 123 dollars

New York’s main oil futures contract, light sweet crude for July delivery, shed 59 cents to 123.72 dollars a barrel.

Brent North Sea crude for July lost one dollar to 123.58 dollars.

"Crude prices were still lower (on Wednesday), extending last nights losses after a sudden surge in the dollar," said Sucden analyst Andrey Kryuchenkov.

"In addition to a potentially stronger dollar, investors are still concerned about signs of flattening demand for energy due to high prices."

The market fell sharply on Tuesday as the greenback strengthened, which tends to dampen demand because dollar-priced oil becomes more expensive for foreign buyers.

Prices slumped by almost three and a half dollars on Tuesday as the US unit surged in response to comments from US Federal Reserve chairman Ben Bernanke.

Bernanke said Fed policymakers were "attentive" to the sagging dollar because of its potential impact on inflation.

Kryuchenkov added: "The US central bank is starting to focus on inflation again and this could support the dollar, while putting more pressure on oil prices."

Later Wednesday, traders will focus on the US governments Energy Information Administration, which was expected to reveal that American crude and gasoline reserves rose in the week ending May 30.

Oil prices have now lost about 12 dollars since striking record peaks of 135.14 dollars in London and 135.09 dollars in New York on May 22.

"The days of establishing new record prices appear to be temporarily over," said Victor Shum, an analyst with energy consultancy Purvin and Gertz in Singapore.

Despite recent losses, oil prices have still gained almost a quarter in value since they smashed through 100 dollars per barrel at the start of 2008.

Traders remain worried that the high cost of crude could erode global energy demand.

"The market focus is currently more on the inflows of demand destruction news," said Petromatrix analyst Olivier Jakob.

"India is the latest country to be added to the list of emerging countries reducing oil subsidies."

India’s government on Wednesday boosted fuel prices for the second time in a year to stem huge losses at state-run oil firms, stirring widespread political anger and worries about higher inflation.

India, which imports 70 percent of its oil needs to feed its fast-growing economy but is faced with surging global crude costs, raised petrol prices by five rupees (12 cents) a liter and diesel by three rupees.

The increases were much higher than rises announced in February but not enough to compensate for the climb in global fuel costs.