Oil fell to $72 on Wednesday, extending a nearly 2 per cent drop in the previous session on gains for the dollar and negative sentiment pervading financial markets.

The dollar hovered near a four-year high against the euro hit the previous day, and was up a third of a per cent against a basket of currencies.

The European Central Bank warned on Tuesday that the region's banks may face a new wave of losses, with additional dollar strength coming from stronger-than-expected US construction and manufacturing data.

US crude for July fell 56 cents to $72.02 a barrel at 0353 GMT, pressured by the sliding euro. ICE Brent dropped 43 cents to $72.28.

"I don't think the market will go much lower but it needs some time to regain power," said Keichi Sano, general manager of research at SCM Securities in Tokyo.

"Data in the US is good and there is no reason to be so upset about the European credit issues," Sano said.

The market may take further direction from US inventory reports scheduled for Wednesday and Thursday.

US crude oil inventories were forecast to have slipped by 200,000 barrels last week as refineries increased crude processing and imports eased, a Reuters survey of analysts showed.

For gasoline, the forecast was for a drop of 500,000 barrels as supply was sent to secondary and tertiary sources ahead of the US Memorial Day long weekend, which kick-starts the country's driving season running from late May through early September.

"The oil inventory reports might be able to change the sentiment of the market," said Sano.

Distillate stockpiles including diesel and heating oil were expected to have gained 300,000 barrels.

The industry group American Petroleum Institute will issue its report a day late on Wednesday at 2030 GMT, while government statistics from the US Energy Information Administration will be published on Thursday at 1500 GMT, instead of the usual Wednesday release. – Reuters