SINGAPORE -- Oil prices held near a six-week low on Wednesday, as worries increased over dwindling US demand at the same time as fears eased hurricane Dolly would deal a major blow to oil and gas supply.
A rebound in the dollar on the back of comments from a Federal Reserve official suggesting US interest rates may have to rise also reduced the appeal of commodities, prompting investors to exit oil.
US light crude for September delivery fell 12 cents to $128.30 a barrel after it fell as low as $125.63 a barrel in intraday trading on Tuesday -- its weakest since early June.
London Brent crude slipped 25 cents to trade at $129.30 a barrel by 0112 GMT.
The fall in US crude extended losses from the July 11 record high over $147 a barrel that marked the steepest price fall in dollar terms in oil's history -- leading some analysts to question how soon the market will resume its six-year rally.
"The decline in oil prices reflects concerns that slower economic growth in the US and high oil prices are crimping oil demand," said David Moore, commodity strategist at Commonwealth Bank of Australia.
Mounting economic woes in the United States and continued lackluster energy demand from the world's biggest consumer nation were key factors behind the drop in oil prices, dealers said.
Oil is, however, still up almost 30 percent this year and more than six times higher than in 2002, in a rally driven by booming demand from fast-growing Asian economies such as China.
Remarks by Philadelphia Fed president Charles Plosser that rising inflation could force the Fed to start raising interest rates even before financial markets recover amid a surge in inflation, supported the dollar, in turn, hitting crude.
Further alleviating supply concerns, hurricane Dolly was expected to make landfall well away from the most sensitive offshore platforms, even after it was upgraded to the Atlantic season's second hurricane late Tuesday.
US Gulf of Mexico producers shut 5.0 percent of oil and natural gas production Tuesday but those shutdowns were expected to be short-lived.
Market attention was also on US data due later on Wednesday, which are expected to show crude stocks falling by 700,000 barrels, according to a Reuters poll.
Refinery utilization was little changed at around 89.5 percent of capacity but inputs of feedstock, or crude runs, likely dropped, some of the polled analysts said.
The US Energy Information Administration will release its inventory report for the week to July 18 at 1435 GMT
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