NEW YORK (Reuters) - Oil fell on Tuesday after four straight higher finishes as the dollar bounced from its lows and cautious investors took profits after the dollar's early slip and cold weather in Europe and the United States had pushed oil to a 26-month peak above $90 a barrel.
Uncertainty about passage of a deal struck by U.S. President Barack Obama with Republicans to extend Bush-era tax cuts pressured oil prices after news of the plan earlier helped boost U.S. equities and oil.
The dollar surged against the yen and the dollar index .DXY turned positive as the proposed tax cut extension triggered higher U.S. Treasury yields. <USD/> <US/>
U.S. crude for January delivery fell 69 cents to settle at $88.69 a barrel after rising as high as $90.76, the highest intraday front-month price since October 2008.
The day's peak was just above the top of the $70-$90 a barrel price range that Saudi Arabia and OPEC last month said was acceptable to consumers. OPEC meets on December 11, with oil ministers expected to keep existing supply targets.
U.S. crude trading volume continued to rebound from the late-November holiday slump, with volume above 912,000 lots on Tuesday, 44 percent above the 30-day average, according to Reuters data.
ICE Brent crude for fell 6 cents to settle at $91.39 a barrel, falling from an earlier $92.86 peak.
"Crude pushed above $90, but lost momentum and the more nervous longs probably took a little profit," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
"The fundamentals are still not spectacular and that may make investors cautious. But if equities stay strong and the dollar weak, that may attract buyers back into crude."
The U.S. dollar benefited from the higher Treasury yields even amid concerns about the size of the U.S. debt and the euro pared its gains versus the dollar as concerns about euro zone debt persisted.
Oil and dollar-denominated commodities often move inversely to the dollar. A stronger dollar typically pressures oil prices as it raises the value of greenbacks paid to producers while making it more expensive for consumers using other currencies.
Uncertainty about the tax-cut deal negotiated by President Obama emerged as top House of Representative Democrats voiced concern about plan components and Republican Senator George Voinovich said he would not support the tax compromise.
"I think the tax deal was part of the rally early, but if questions remain about passage of the deal they could cause traders to give up on the long side," said Tom Bentz, broker at BNP Paribas Commodity Futures Inc in New York.
Also stoking investor caution was a report in an official newspaper saying that China's central bank may raise interest rates this weekend in another move to cool rising inflation.
COLD WEATHER LIFT
Temperatures in Europe's main heating hub of the northwest were expected to stay below seasonal norms over the next 10 days, according to private forecaster DTN Meteorlogix.
Weather forecasts show the coldest weather so far for the 2010-2011 winter expected early next week in the U.S. Northeast, the nation's biggest heating oil consuming region.
The American Petroleum Institute industry group said late on Tuesday that U.S. crude oil stocks fell 7.3 million barrels in the week to December 3. The drop was much steeper than expected and came despite rising crude oil imports as refiners ramped up utilization and refined products stockpiles rose.
The API said gasoline stocks rose 4.8 million barrels and distillate stocks rose 1.7 million barrels.
Crude oil futures pared losses slightly after the report, but were still off more than $1 in post-settlement trading.
Crude oil stocks were expected to be down 1.3 million barrels, distillates by 500,000 barrels and gasoline stocks up only 500,000 barrels, a Reuters analyst survey ahead of the API report showed.
The Energy Information administration will release the government's inventory report on Wednesday at 10:30 a.m. EST.