Benchmark crude for September delivery was down $1.54 to $65.69 a barrel by afternoon in European electronic trading on the New York Mercantile Exchange. On Tuesday, the contract fell $1.15 to settle at $67.23.
"In familiar fashion, the decline occurred in line with losses on Wall Street and a strengthening dollar," Vienna's JBC Energy noted. Traders look to U.S. stocks and the American currency for direction, buying into crude as a hedge against dollar weakness and selling as the greenback strengthens.
Oil fell against a backdrop of new economic data showing continued weakness in the U.S. economy, with orders to U.S. factories for big-ticket durable goods plunging in June by 2.5 percent, the largest amount in five months.
The figure was much larger than the 0.6 percent decline economists had expected and was the biggest setback since a 7.8 percent fall in January.
Much of the weakness reflected a 38.5 percent decline in orders for commercial aircraft, an industry that has been hurt by the global recession, which has crimped air travel and triggered some airlines to cancel existing orders for planes.
Orders for motor vehicles and parts fell by 1 percent in June after an even larger 8.7 percent drop in May. The weakness reflected the disruptions caused by the bankruptcy filings of General Motors Corp. and Chrysler LLC, which shut their plants for most of June, plus the need for the entire industry to work down a backlog of unsold cars.
Still, there was some good news in the data - excluding the volatile transportation sector, orders for durable goods were actually up by 1.1 percent in June, a better performance than the flat reading economists had expected.
The strength outside of transportation could be a harbinger of better days ahead for manufacturing, but the immediate effect of the data was to make investors cautious about the pace of recovery.
On Tuesday, the Conference Board said its consumer confidence index fell more than analysts expected in July. That was a bad sign for U.S. gasoline demand, which has already disappointed investors so far this summer.
U.S. crude inventories rose more than expected last week, another signal demand remains tepid despite an improving economy.
Inventories rose 4.1 million barrels last week, the American Petroleum Institute said late Tuesday. Analysts expected the API numbers to gain 1.1 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.
Investors will be watching for inventory data from the Energy Department's Energy Information Administration on Wednesday for more signs about crude demand.
The API numbers are reported by refiners voluntarily, while the EIA figures are mandatory.
In other Nymex trading, gasoline and heating oil for August delivery both by over a cent to $1.89 and $1.75 a gallon. Natural gas for August delivery slid 3 cents to $3.51 per 1,000 cubic feet.
In London, Brent prices fell $1.16 to $68.72 a barrel on the ICE Futures exchange.
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Associated Press writer Alex Kennedy contributed to this report from Singapore.
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