Oil prices plummet after 4 days of gains

NEW YORK (CNNMoney.com) -- Oil prices dropped sharply Tuesday as a stronger dollar, fueled by renewed European sovereign debt woes and signals of lower demand, lessened the appeal of buying crude.

But gasoline prices continued their climb, up 0.9 cent a gallon in the latest survey conducted for motorist group AAA.

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What prices are doing: Crude oil for June delivery plunged $3.45, or 4%, to settle at $82.74 a barrel, breaking a four-day rally.

Crude prices charged higher Monday amid optimism about Greece's $146 billion bailout and the possibility that the Gulf of Mexico spill could halt supply. Crude prices are up nearly 4% in the past week, and are about 70% higher than this time last year.

What's moving the market: Prices plummeted as pessimism over Europe's debt crisis resurfaced, boosting the dollar, and lessening the appeal of crude as an investment.

Fears that Greece's bailout would not gain the full support of other European nations and that contagion is imminent re-emerged. Bond yields for debt-laden PIIGS nations - Portugal, Ireland, Italy, Greece and Spain - spiked again.

Consequently, the dollar touched new 12-month highs against the euro, rising nearly 1.5% against the European currency. A stronger dollar makes crude, which is priced in the greenback, more expensive for foreign investors. This tends to dampen demand and prices.

The U.S. stock market plummeted on contagion fears. Crude oil followed suit, as traders speculated that the global economic recovery and energy demand would stall.

A bearish crude inventory forecast fueled those fears. A survey by research firm Platts released Monday, found that analysts expect crude stocks to have jumped by 1.54 million barrels last week. Gasoline is expected to have risen by 200,000 barrels and distillate stocks - used for heating oil and jet fuel - are seen climbing by 1.89 million barrels.

If estimates are accurate, crude supplies would have risen 13 out of the last 14 weeks. Actual data from the American Petroleum Institute is due out late Tuesday. The EIA reports its numbers Wednesday.

What analysts are saying: "Sovereign concerns are hanging over the market like a dark cloud,"said Gianna Bern, president of Brookshire Advisory and Research.

"This will result in a strong dollar and put pressure on commodities prices," she said.

Over the weekend, Greece was given a $146 billion bailout, sponsored by the European Union and IMF. The market supported the move Monday, but reversed its stance as worries over contagion resurfaced.

Still, many analysts have said that the recent rise in crude prices was unjustified, given demand is still slack.

"At $86 a barrel, we've been a bit overpriced the past couple of days," said Bern. "We ought to have retrenched, given the fundamentals."

According to Bern, crude supplies are about 10.8 million barrels above the 5-year average, which she calls "considerable" supply. Another weekly build in inventories could signal that a return in demand is far off, sending prices lower.

Gas prices: Gas prices continued to rise, according to AAA. The average price of a gallon of regular unleaded gas on Tuesday was $2.904, up nearly 1 cent from $2.895 on the previous day. Prices are more than 40% higher than this time last year.

Analysts expect that gasoline prices will rise further as the summer driving season in the United States, the world's largest energy consumer, gets underway. But they do not expect to see the record levels - over $4 a gallon - of July 2008, unless there is a massive disruption in the market.