Dollar rally sinks oil; Brent down more than U.S. crude

NEW YORK (Reuters) - A rallying dollar sent oil prices lower on Tuesday, with Brent (brent.167)falling more than U.S. crude as traders took profits on recent highs in Brent's premium, traders said.

Expectations of a mid-year U.S. rate hike sent the dollar soaring to multi-year highs, making commodities denominated in the greenback costlier for holders of other currencies.

Brent, the London-traded global oil benchmark, slumped more than 3 percent.

In New York, U.S. West Texas Intermediate (WTI) crude fell almost 3 percent, pressured by the strong dollar and expectations that data would show another record high in U.S. crude inventories last week from supply builds.

Even so, WTI fell less than Brent as players bet on a further narrowing of its discount to the London benchmark after forecasts for a modest build last week in the Cushing, Oklahoma delivery point for U.S. crude versus the rest of the country. [EIA/S]

"The dollar's might is creating unexpected headwinds for oil. Brent particularly is taking it harder than WTI as people unwind and take profit in the spread between the two," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York.

Brent tumbled $2.25, or about 4 percent, to $56.28 a barrel by 1:35 p.m. EDT. U.S. crude fell $1.65, or 3 percent, to $48.35.

The Brent-U.S. crude differential fell to a three-week low under $8 a barrel. The spread has narrowed by nearly 40 percent since the end of February, when it was $13, its highest in 13 months.

"Brent is looking increasingly heavy with a decline likely to lowest levels in almost four weeks expected within the next couple of sessions," oil analysts at Jefferies said in a note.

Between June and January, crude prices fell 60 percent on fears of a global oil glut and the refusal of Saudi Arabia and other OPEC members to cut output. Last month, Brent stabilized at around $60 and U.S. crude at around $50.

Saudi King Salman said in a speech on Tuesday his kingdom will continue with oil and gas exploration despite the price drop.

Forecasters surveyed by Reuters expected U.S. data to show crude inventories at a ninth straight week of record highs.

The industry group American Petroleum Institute reports its weekly stockpile numbers at 4:30 p.m. EDT before official data on Wednesday from the Energy Information Administration.

(Additional reporting by Claire Milhench in London and Keith Wallis in Singapore; Editing by Jason Neely, Dale Hudson, Andrew Hay and David Gregorio)