Oil fell Tuesday because of a stronger dollar and expectations that U.S. supplies are rising.
The dollar gained ground against the euro and other major currencies. Oil is priced in dollars and it becomes less attractive to investors with foreign currencies as the dollar gets stronger.
Benchmark West Texas Intermediate crude for June delivery fell $2.47, or 2.2 percent, to settle at $111.05 per barrel on the New York Mercantile Exchange. In London, Brent crude dropped $2.67 to settle at $122.45 per barrel.
Predictions that the Energy Department on Wednesday will say that crude oil supplies grew last week also pushed down the price. Analysts surveyed by Platts, the energy information arm of McGraw-Hill, expect that U.S. oil supplies increased by 1.7 million barrels.
Energy markets are still assessing what, if any, impact the death of Osama bin Laden will have on global supplies and prices. There is concern that extremists may try to attack oil fields and pipelines to retaliate for U.S. forces killing bin Laden in Pakistan on Sunday. But some analysts point out that the Federal Reserve's policies have had more influence on oil prices than bin Laden.
"It will be a few days before the full impact of bin Laden's death is calculated," energy consultants Cameron Hanover said in a note to investors. "But, long after memorials are read and effigies burned, the Fed's words will be the ones that move oil prices the farthest."
The Fed has kept short-term interest rates near zero, weakening the dollar as investors seek higher returns in other currencies. This has helped push oil prices up about 48 percent in the past year, from $76 a barrel in May 2010.
Gas pump prices have followed oil higher, and they are still climbing. The national average for a gallon of regular was $3.97 on Tuesday. That's 32 cents higher than a month ago and $1.07 more than a year ago.
Consumers are buying less gas as prices rise. The MasterCard SpendingPulse weekly national survey of retail gas sales released Tuesday showed the four-week average of gas consumption was down for the sixth consecutive time.
Tuesday's decline in oil could be a sign of lower prices to come, according to Cameron Hanover. "Prices seem overdue for a correction or reversal. It is just too early now. We are still in the spring seasonal for higher prices. But, the fact that a large sell-off is coming, though, and that we are seeing corrections with increased frequency, tells us that the larger decline is coming at some point, soon."
In other Nymex trading, heating oil lost 6.13 cents to settle at $3.1908 per gallon, gasoline futures gave up 1.85 cents to settle at $3.3294 per gallon and natural gas fell 2.5 cents to settle at $4.738 per 1,000 cubic feet.