The euro neared a one-year low against the dollar after data showed euro zone banks were still hoarding cash rather than lending it out, unnerving markets ahead of an important Italian bond sale and raising concerns about oil demand growth.
"The complex wasted little time in offsetting yesterday's strong gains as the Tuesday injection of geopolitical risk premium was negated by today's broad based de-risking," Jim Ritterbusch, president at Ritterbusch & Associates, said in a note."
"Today's loss of risk appetite was triggered by a decline in the euro to 11 month lows, a drop that developed despite a well received short term Italian debt auction," Ritterbusch added.
The gains in the dollar .DXY weighed on commodities, dragging gold down 2 percent and outweighing oil market concerns about Iran's threats to shut off the Strait of Hormuz, a crucial chokepoint in the transport of crude.
U.S. stocks fell more than 1 percent following a recent year-end rally and the S&P 500 erased gains for the year on renewed concerns about the euro zone and worries about a difficult start to 2012. .N
Brent February crude fell $1.71 to settle at $107.56 a barrel. After briefly rising and pushing above its 50- and 100-day moving averages to reach $109.50, Brent fell as low as $106.77, below its 300-day moving average of $107.78.
Brent remained on pace to post a 14 percent gain for the year, after posting a nearly 22 percent rise in 2010.
U.S. crude fell $1.98 to settle at $99.36 a barrel, having traded as low as $99.11. U.S. crude was on pace to post a 9 percent rise for the year, after jumping 15 percent in 2010.
Crude trading volumes remained thin in the year-end holiday week, with Brent turnover 40 percent and U.S. crude 51 percent below their 30-day averages.
U.S. heating oil and European gas oil were more resilient, off just over 0.5 percent, because of concerns that Swiss refiner Petroplus could face a shutdown of its plants after lenders froze about $1 billion in borrowing allowances the company uses to buy crude.
Petroplus owns about 4.4 percent of European refining capacity and may run out of crude feedstocks in the coming days, according to traders, tightening products supplies and threatening exports to the United States.
The Petroplus problems came as Repsol (REP.MC) halted operations of its 220,000 barrels-per-day Bilbao refinery for four and a half days due to strike action.
IRAN, SANCTIONS, THREATS
Facing the possibility of more European Union sanctions over its nuclear program, Iran's first vice-president on Tuesday warned that the flow of oil through the Strait of Hormuz would be stopped if foreign sanctions are imposed on Iran's oil exports.
Closing off the Gulf to oil tankers will be "easier than drinking a glass of water," Iran's top naval commander told the country's state television on Wednesday.
The U.S. Fifth Fleet said it would not allow any disruption of traffic in the strait. France urged Iran to adhere to international law allowing freedom of navigation.
Turmoil and internal strife in fellow OPEC-members Iraq and Nigeria also have added to the concerns about potential threats to oil supply.
U.S. OIL INVENTORIES
Data from MasterCard showed U.S. gasoline demand continued to struggle, with driving demand down 1.6 percent over the Christmas holiday compared with a year ago, though demand was up versus the previous week.
Crude prices briefly extended losses in post-settlement trading after the American Petroleum Institute said U.S. crude stocks rose 9.6 million barrels last week.
Gasoline stockpiles rose 1.9 million barrels and distillate stocks rose 554,000 barrels, the API said.
Ahead of weekly reports on stockpiles, U.S. crude inventories were expected to have fallen 1.7 million barrels, with distillate stocks down 500,000 barrels and gasoline stocks slipping 100,000 barrels, according to a Reuters survey of analysts.
The U.S. Energy Information Administration's weekly inventory report will follow at 11 a.m. EST (4:00 p.m. British time) on Thursday.
(Additional reporting by Ikuko Kurahone in London and Randy Fabi and Seng Li Peng in Singapore; editing by Jim Marshall and David Gregorio)
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