Oil falls as dollar strengthens, ample supply weighs

NEW YORK (Reuters) - Oil prices fell 2 percent on Tuesday as the dollar's sharp rally weighed on dollar-denominated crude oil futures along with concerns that a recent rally might keep U.S. producers active.

The U.S. dollar index rallied as Greece's financial crisis and signs of increasing opposition to austerity in Spain pressured the euro. [MKTS/GLOB] [USD/]

"Pressuring oil is the dollar's strength on the concerns about Greece being able to make its debt payments and the U.S. Federal Reserve seeming to be closer to raising rates," said Phil Flynn, analyst at Price Futures Group in Chicago.

Friday's weekly data showed U.S. drillers cut the number of rigs by just one last week and Goldman Sachs said prices were at a level that would spur activity, adding to a growing list of headwinds crude faces that include rising OPEC supply. [RIG/U]

On Sunday, Iran said the Organization of the Petroleum Exporting Countries (OPEC) was unlikely to change its production ceiling at its meeting on June 5.

Brent crude for July delivery was down $1.68 at $63.84 a barrel at 11:11 a.m. EDT (1511 GMT).

U.S. July crude was off $1.44 at $58.28, having slipped to $58.22 intraday and testing support in the area of $58.30 anticipated by brokers.

"The main factor weighing on prices is the significantly appreciating U.S. dollar," said Carsten Fritsch, analyst at Commerzbank. "What is more, the decline in drilling activity in the U.S. that has been ongoing for 23 weeks appears to have stopped."

More drilling in the United States would lessen the prospect of a tighter oil market in coming months, one of the factors that have helped Brent rise from a near six-year low close to $45 in January.

"We believe that should West Texas Intermediate prices remain near $60 a barrel, U.S. producers will ramp up activity, given improved returns," Goldman said in a report.

A stronger dollar makes dollar-priced commodities more expensive for buyers using other currencies, and tends to weigh on oil prices. The dollar hit a one-month high against a basket of major currencies on Tuesday.

"The USD downward correction is complete," Morgan Stanley said in a report. "A stronger dollar would only reinforce our near-term concerns for oil prices, especially Brent."

(Additional reporting by Alex Lawler in London and Henning Gloystein in Singapore; Editing by Marguerita Choy)

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