LONDON, June 3: Oil fell by around $2 a barrel to $126 a barrel on Tuesday, after the US Federal Reserve issued a rare warning on the inflationary risk posed by a weak dollar.

US crude was down $1.78 at $125.98 a barrel by 1502 GMT after earlier hitting a session low of $125.65.

London Brent crude fell $1.72 to $126.30 a barrel.

One of the factors driving investment in commodities this year has been the weakness of the US currency, which encourages buying of dollar-denominated commodities as a hedge against inflation.

Some analysts say oil’s rapid rise of about 30 per cent since the start of the year had a speculative element. That was the view of influential hedge fund manager George Soros.

Analysts said there was mounting evidence demand for oil was easing and expectations that Asian economies, which have led growth in fuel consumption, will slash subsidies because they have become too costly.

Indonesia, Sri Lanka and Taiwan have already announced cuts to subsidies, while Malaysia said it would scrap fuel price controls in August in a move that could double pump prices. India was also expected to raise fuel prices on Wednesday.

“The high oil price will clearly be more keenly felt by the end-consumer without these subsidies,” said Tom Nelson, an analyst for the Guinness Global Energy Fund, which takes long-only positions in oil and gas firms.

The head of the International Energy Agency (IEA) told Reuters on Monday that world oil demand was shrinking more quickly than first thought and the IEA might cut its demand growth forecasts further.—Reuters