Oil down over 2 percent as dollar soars on U.S. rate hike fears

By Barani Krishnan

NEW YORK (Reuters) - Crude oil prices fell more than 2 percent on Thursday as the dollar's surge on U.S. rate hike expectations drove players from the oil market.

Fear that the U.S. Federal Reserve may raise rates by next month prompted investors to cash out of long positions in Brent and U.S. crude's West Texas Intermediate (WTI) futures that rallied earlier in the week on oil supply outages.

"Petroleum prices are under selling pressure as part of a wider risk-off trade flow across a wider range of commodities as the U.S. dollar index has extended its recent rally," said Tim Evans, energy futures specialist at Citi Futures in New York.

The dollar index (DXY), measured against a basket of currencies, hit a near two-month high, furthering its gains from the previous session that made the greenback-denonimated oil less attractive to holders of the euro

Brent futures' front-month contract, July , was down $1.40, or 2.8 percent, at $47.53 a barrel by 11:08 a.m. EDT (1508 GMT).

WTI's June contract , which expires as front-month at Thursday's settlement, fell $1.30, or 2.3 percent, to $46.89 a barrel. July WTI was down $1.37 to $47.56, narrowing the discount, or contango, between the second-month and the front to the lowest since October. .

Oil prices gained 3 percent over the first two days of the week on fresh threats to Canadian supplies from wildfires and worries about Nigerian, Libyan and Venezuelan supply outages.

That was before Wednesday's release of the Fed's April policy meeting minutes that showed the central bank likely to raise rates in June if there was stronger second-quarter growth and firmer inflation and employment.

Analysts at BNP Paribas (PA:BNPP) said oil markets have moved "too high, too far, too soon".

"We still face a large inventory overhang and for the most part, the outstanding supply outages - Canada and Nigeria - are reversible," they said in a report.

Some argued that the soaring dollar was likely to pause but not stop the recovery in crude prices that have brought Brent up from $27 in January and WTI to rebound from $26 levels in February.

"Although the hawkish comments out of the Fed alluding to a possible rate hike as early as next month are forcing us to reduce our short term upside crude targets by about $2 a barrel, we are not viewing this macro development as capable of forcing a high anywhere across the energy complex," said Jim Ritterbusch of Chicago-based oil consultancy Ritterbusch & Associates.