* Commodities lose appeal with stronger dollar -risk manager
* Technicals show U.S. crude headed for $88.36
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* Coming Up: EIA weekly U.S. oil inventory report; 1530 GMT
(Adds risk manager's comments)
By Alejandro Barbajosa
SINGAPORE, Jan 5 (Reuters) - Oil fell for a second day on
Wednesday, extending the previous session's 2.4 percent drop,
as investor enthusiasm for commodities diminished with a
stronger dollar, following a sharp year-end rally in raw
material prices.
U.S. crude for February <CLc1> shed 20 cents to $89.18 a
barrel at 0432 GMT, after reaching a 27-month high of $92.58
on Monday.
Tuesday's drop was the biggest single-day percentage loss
since Nov. 16, when prices closed almost 3 percent lower.
"Ninety dollars a barrel already has a very strong
economic picture built into the price," said Tony Nunan, a
risk manager with Tokyo-based Mitsubishi Corp.
"Maybe people think the price is starting to get too high,
and if the dollar is stronger, we should have lower commodity
prices."
ICE Brent for February <LCOc1> fell 19 cents to $93.34,
while the dollar strengthened almost 0.2 percent against a
basket of currencies .
Investors said abrupt selling across energy, metal and
agricultural markets reflected a correction to the rally that
capped 2010, rather than a sudden reversal of the optimism
that made commodities the top asset class last year.
Gains in U.S. fuel stockpiles outpaced a drop in the
nation's crude inventories during the last week of 2010,
industry group the American Petroleum Institute reported on
Tuesday.
Crude inventories plunged 7.5 million barrels in the week
through Dec. 31, much greater than analyst expectations of a
1.8-million-barrel drawdown in a Reuters poll.
But gasoline stocks rose 5.6 million barrels, far
outstripping analyst expectations of a 300,000-barrel
increase, while distillate stocks rose 2.2 million barrels,
compared with forecasts for a 400,000-barrel rise.
Government statistics from the U.S. Energy Information
Administration will follow on Wednesday at 1530 GMT.
INVENTORIES MAY REBOUND
Traders have noted that there was an expectation that oil
inventories will rebound in the new year and provide pressure
on prices after companies drew down stored supplies for tax
reasons at the tail end of 2010.
"Inventories have come down substantially from the peak,
but they are still relatively high for the commercial U.S.
total," Mitsubishi's Nunan said. "That is why $90 might be a
bit of a stretch, and we still have fairly decent OPEC spare
capacity."
Commodities fell sharply on Tuesday as investors took
profit on the heady gains made on thin holiday volume over the
past three weeks.
The Reuters-Jefferies CRB index dropped nearly 2
percent in its sharpest one-day fall since mid-November after
investors and traders worldwide returned to work to find many
markets had run up to their highest in two years or more.
In other financial markets, Wall Street also pulled back
after a strong December boosted equities to two-year highs,
with consumer and energy stocks weaker.
The dollar held firm on Wednesday, supported by further
evidence that the U.S. economic recovery is becoming
self-sustained, while the correction in commodity prices
pressured the Australian dollar.
(Reporting by Alejandro Barbajosa; Editing by Ed Lane)
