Nov. 27 (Bloomberg) -- Crude oil in New York fell as Dubai’s attempt to reschedule its debt bolstered the dollar and prompted investors to sell commodities.

Oil dropped 2.5 percent as the U.S. currency climbed, dulling the appeal of raw materials as an alternative investment, and equities tumbled. Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayments.

“The situation in Dubai revives worries about the recovery of the economy,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “The strength of the recovery has an obvious and immediate impact on both oil demand and prices.”

Crude oil for January delivery declined $1.91 to settle at $76.05 a barrel on the New York Mercantile Exchange. The contract fell 1.8 percent this week. Futures are up 71 percent this year. New York oil didn’t settle yesterday because of the Thanksgiving holiday.

The U.S. currency traded at $1.4963 per euro, up 0.4 percentage point from $1.5019 yesterday. The dollar is down 7.1 percent this year.

“A weak dollar can continue to hold us above $70, but a confirmed and sustained reversal of the dollar will open the door for a more substantial price retracement,” said Tom Knight, vice president of trading and supply at Truman Arnold Cos. in Texarkana, Texas.

Equity Market

U.S. stocks slipped, joining a global slump that began yesterday, when American exchanges were closed. The Standard & Poor’s 500 Index declined 1.7 percent to 1,091.49 and the Dow Jones Industrial Average fell 1.5 percent to 10,309.92. Equity markets closed at 1 p.m. in New York, three hours early.

“This big move has very little to do with oil,” said Michael Fitzpatrick, vice president of energy with MF Global in New York. “This is all about the flow of investment capital. The panic about Dubai is resulting in a flow to the relative safety of the dollar.”

The U.S. Energy Department reported on Nov. 25 that crude stockpiles rose 1.02 million barrels to 337.8 million barrels last week. The gain left inventories 7.8 percent higher than the five-year average for the period. Supplies of gasoline and distillate fuel, a category that includes heating oil and diesel, were also above average, according to the department.

Gasoline for December delivery fell 7.14 cents, or 3.6 percent, to end the session at $1.9262 a gallon in New York. Heating oil for December delivery declined 2.79 cents, or 1.4 percent, to $1.9622 a gallon.

Total U.S. daily fuel demand averaged 18.7 million barrels in the four weeks ended Nov. 20, down 2.9 percent from a year earlier, the report showed.

Weak Demand

“We don’t have any demand for gasoline now and no demand for heating oil,” said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. “We’re still going to ebb and flow with the stock market, but the fundamentals are being considered much more than they were earlier in the year.”

A glut of crude in the U.S. is capping prices at $80 a barrel and eroding the link between oil and the dollar, according to Petromatrix GmbH.

“This week oil has fully decoupled from the dollar,” Petromatrix Managing Director Olivier Jakob said in a telephone interview from Zug, Switzerland. “It has totally broken down.”

Widening Discount

The widening discount of prompt oil to longer-term contracts, or contango, is hurting funds trying to “roll” their positions from the front contract to the next, more expensive month, prompting them to scale back investment in oil, Jakob said.

The price of oil on the Nymex for delivery in January is $1.31 a barrel lower than for February, wider than a $1.23 discount on Nov. 25. It’s the biggest spread between front-month contracts since Aug. 19.

“The strength of the relationship between the dollar and oil is very unstable and has been reduced,” Sieminski said. “If the relationship were strong, as it had been between early 2007 and the spring of 2009, we would have $100 oil. The traditional fundamentals, such as supply, demand, production and refining capacity, are taking on more importance.”

Brent crude oil for January settlement rose 19 cents, or 0.3 percent, to end the session at $77.18 a barrel on the London-based ICE Futures Europe exchange. The contract fell 1.8 percent yesterday.

Oil volume in electronic trading on the Nymex was 438,380 contracts as of 1:30 p.m. in New York. Volume totaled 627,808 contracts on Nov. 25, 11 percent above the average of the past three months. Open interest was 1.18 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

Last Updated: November 27, 2009 14:54 EST