Brent crude slipped from three week highs on Tuesday, as the dollar firmed on the back of data from the United States suggesting the world's top oil consumer is not sliding back into recession.
Brent crude futures were 32 cents lower at $111.56 a barrel by 1241 GMT, retreating from earlier highs of $112.48 as the dollar index to a basket of currencies surged by 0.5% .
U.S. crude was down 64 cents to $86.65.
"Financial assets are the main driver for oil now... It depends very much on the stock market sentiment today," said Carsten Fritsch from Commerzbank.
The greenback firmed in tandem with stock markets, as money switched back to riskier assets after U.S. data showed consumer spending in the world's largest economy rose at its fastest pace in five months in July.
"The main global input yesterday was a stronger than expected increase in U.S. consumer spending, at +0.8% in July compared to -0.1% in June," said Olivier Jakob from Petromatrix. "The other side of the coin however is that real disposable income dropped by -0.1% compared to +0.3% in June."
Investors will scrutinise the barrage of key U.S. data this week for signs on the health of the world's largest oil consumer, including consumer confidence, the ADP jobs report, ISM manufacturing and the non-farm payrolls report.
The market will also keep an eye on minutes from the U.S. Federal Reserve's last committee meeting on Aug. 9, due on Tuesday, which could offer insight on divisions among board members over further stimulus measures.
In Europe, a merger between two Greek banks gave a much needed capital boost to a sector battered by the country's severe debt crisis that has threatened to spread through the euro zone.
Markets were also keeping an eye on the U.S. crude oil inventory, which probably rose last week on continued inflows from the Strategic Petroleum Reserve and evacuations forced by Hurricane Irene, a preliminary Reuters poll showed.
Analysts expect crude inventories in the week to Aug. 26 to have risen by 1.2 million barrels while gasoline stocks may have dropped by 1.4 million barrels and distillate stockpiles are expected to have risen 1.1 million barrels.
U.S. refiners and energy companies on Monday began to restore operations disrupted by Hurricane Irene over the weekend. One refinery was heard to have suffered damage to a crude unit due to flooding, while another remained shut.
Italy's Eni SpA signed a deal with Libya's ruling interim council on Monday aimed at quickly restarting its oil and gas operations in the country following concerns it could lose its dominant position to rivals.
A spokesman for Libya's Arabian Gulf Oil Company (AGOCO) told Reuters earlier that it planned to restart production at two eastern oilfields in mid-September and resume shipping oil from Tobruk by the end of the same month.
"Prices could also soften with the reinstatement of Libya's new government after the downfall of Gaddafi's regime and announcements they would restart production at two eastern oilfields in mid-September and resume shipping oil by the end of the month," ANZ analysts said in a note.
"But with the focus on risks to global growth, oil prices are likely to be led by moves in financial markets," they added.