Oil falls on demand worries

By Richard Valdmanis

NEW YORK (Reuters) - Oil fell sharply on Tuesday after the U.S. Federal Reserve signalled it was taking aim at inflation, triggering a rebound in the U.S. dollar and a sell-off across commodities markets.

Further pressure on prices came after two of the world's biggest energy forecasters lowered their outlook for global energy demand as high prices bite consumers, easing the effect of lacklustre increases in world production.

U.S. crude dropped $3.04, or 2.26 percent, to settle at $131.31 a barrel, well below last Friday's record near $140. London Brent crude fell $2.89 to $131.02.

"Crude is down basically as the dollar is taking off after Bernanke's remarks, which sparked some profit-taking," said Phil Flynn at Alaron Trading in Chicago.

Fed Chairman Ben Bernanke said on Tuesday the central bank would "strongly resist" inflation, cementing views that interest rates will rise later this year.

Oil and other commodities have surged to record heights in recent months as investors piled money into the markets as a hedge against the weak dollar and inflation.

Despite Tuesday's losses, oil prices are up more than sixfold since 2002 in a rally that has pressured the economies of major consumer nations like the United States, already reeling from a housing crisis and credit crunch.

OPEC kingpin Saudi Arabia will host a meeting of oil producers and consumers on June 22 to discuss high oil prices, the group's Secretary General said on Tuesday.