Oil prices fell on Tuesday as the U.S. dollar strengthened and market participants continued to question the sustainability of the recent price rally.
Brent crude for July delivery recently fell 0.8% to $65.02 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures for July were trading down 0.7% at $59.29 a barrel.
The Wall Street Journal Dollar Index, which tracks the dollar against a basket of other major currencies, rose 0.7% on Tuesday. As it is priced in dollars, oil becomes more expensive for holders of other currencies as the greenback appreciates.
"A stronger U.S. dollar would only reinforce our near-term concerns for oil prices," said Morgan Stanley analyst Adam Longson. "We have growing concerns about crude fundamentals and prices in [the second half of 2015] and 2016 after the quick recovery."
Oil prices have rallied by around 40% from their lows on expectations that the oversupplied global market will come into balance later this year. But analysts have questioned the strength of the rally as the fundamentals of the market haven't changed significantly.
According to Morgan Stanley, the renewed dollar strength is part of a "growing list of headwinds" for oil in the short term. Other factors include growing OPEC supply with Saudi and Iraqi production touching record levels, the underappreciated risk of Iranian supply, and some signs of stress in physical markets.
"Moreover, hedging activity has surged and U.S. producers show signs of increasing activity, which could lead to production surprises in [the second half of 2015] and 2016," Mr. Longson said.
Last week, the number of U.S. oil drilling rigs--a proxy for activity in the oil industry--fell by one to 659, according to Baker Hughes Inc., marking the 24th straight week of declines.
The rate of decline, however, has moderated in recent weeks and some U.S. shale players say they could start adding rigs in coming months if prices stabilize near current levels.
"It would seem that the WTI price is now back at a level which makes the production of shale oil attractive again," said Commerzbank analysts. Oil rigs that hadn't quite been completed previously are likely to be drilled and then put into operation at the current price level, which is likely to prevent the decrease in U.S. oil production anticipated by many market participants, the bank said.
"The price level of $60-$65 [a barrel] will be an important one to keep in mind in the months to come," JBC Energy analysts said.
Nymex reformulated gasoline blendstock for June--the benchmark gasoline contract--rose 0.2% to $2.0571 a gallon, while ICE gasoil for June changed hands at $596 a metric ton, down $10.
