Oil settles below $40
Investors respond to a weaker dollar, rising stock prices and grim economic reports.
NEW YORK (CNNMoney.com) -- The price of oil fell Tuesday, after a big rally in the previous session, as dour economic reports darkened the outlook for already weak demand for oil and gasoline.
A weaker dollar and rising stock prices helped limit the selloff.
Light, sweet crude for February delivery fell 99 cents to settle at $39.03 a barrel on the New York Mercantile Exchange. Earlier in the session, oil prices slid below $38 a barrel.
On Monday, the contract surged 12% to trade above $42 a barrel as Israeli warplanes bombarded the Hamas-ruled Gaza strip in retaliation for rocket attacks launched from the region. The conflict prompted some concern that supply from the oil-rich Middle East region could be disrupted.
But the market's initial response was "emotional," said Phil Flynn, senior market analyst at Alaron Trading in Chicago. "The concern that the situation in Israel would lead to disruption in oil supply has gone away."
Flynn added that potential supply disruptions are even less of a concern considering that "OPEC is cutting back on production already."
Members of the Organization of the Petroleum Exporting Countries reduced oil output by 400,000 barrels per day in December, according to a report from oil services company Petrologistics on Tuesday.
OPEC, which provides about one third of the world's oil supply, announced plans earlier this month to cut production by 2.2 million starting in January. It was the largest production cut in the history of the cartel, and came after several other cuts announced this year.
The cuts were aimed at putting a floor under the rapidly declining price of crude, which has plummeted nearly 60% this year, and has cascaded more than $100 since its July peak above $147 a barrel.
"The market is not overwhelmed" by OPEC's production cuts and remains focused on the weak economy and the bleak outlook for energy demand, Flynn said. And Tuesday's economic data "reminds us that the demand for oil is not going to rebound anytime soon," Flynn said.
The Conference Board, a New York-based business research group, said its index of consumer confidence fell to an all-time low of 38 in December from the downwardly revised 44.7 in November. Economists were expecting the index to increase to 45.5, according to a Briefing.com consensus survey of economists.
A separate report showed that home prices in 20 major U.S. cities posted another record decline in October, falling 18% compared with a year earlier. It was the 27th month that the S&P Case-Shiller index has posted losses.
At the same time, analysts said the oil market is being supported by a weaker dollar and a rebound in the stock market.
The U.S. dollar slid 1.4% against the euro and also lost ground against the pound and the Japanese yen.
A less robust buck often pushes oil prices higher because crude is priced in dollars.
On Wall Street, stocks were up as investors looked past the dour economic reports to focus on the government's efforts to rescue the automotive industry.
The oil market sometimes takes its cues from the stock market since rising stock prices could precede an economic recovery. 
