* U.S. dollar index at one-month high over Chinese growth
concerns
* Middle East tensions dashes chance of OPEC deal to curb
glut
* Brent/WTI widens after news of BP Whiting refinery planned
work
* Coming up: API U.S. oil inventory report 4:30 p.m. (2130
GMT)
(Updates with settlement prices, other background, adds quote)
By Catherine Ngai
NEW YORK, Jan 5 (Reuters) - Oil prices dropped over 2
percent towards its 11-year low on Tuesday, as traders shrugged
off growing tensions between two of the world's biggest oil
producers and focused instead on a stronger U.S. dollar and
swelling U.S. crude inventories.
Relations between Saudi Arabia and Iran collapsed in
acrimony this week after the Kingdom's execution of a Shi'ite
cleric set off a storm of protests in Tehran. On Tuesday, Saudi
state news agency reported that four armed men set on fire a bus
transporting workers in the nation's oil-producing Eastern
Province.
Instead of fanning fears of a disruption in supplies,
however, some delegates from the Organization of the Petroleum
Exporting Countries said the rift could exacerbate oversupply
concerns by quashing already faint hope that OPEC could one day
agree to cut output.
The oil market fell under additional pressure from a firmer
U.S. dollar .DXY , which gained 0.5 percent to hit a one-month
high as traders sought safer havens, and signs of a further
swell in already record U.S. inventories. USD/
Brent crude prices LCOc1 fell 80 cents to settle at $36.42
a barrel. Prices hit an 11-year low of $35.98 a barrel just
before Christmas, capping a year where the benchmark's value
dropped by more than a third.
U.S. West Texas Intermediate (WTI) crude CLc1 slipped 79
cents to settle at $35.97 a barrel.
The discount for U.S. WTI crude versus Brent CL-LCO1=R
widened by some 25 cents after a report that BP Plc BP.L was
conducting planned work at a large crude unit at the 413,5000
bpd Whiting, Indiana, refinery.
That should back more crude into the delivery point for WTI
futures at Cushing, Oklahoma, where stockpiles rose nearly
500,000 barrels last week to 65.4 million barrels, according to
Genscape.
Crude inventories were forecast to have risen last week for
the second straight week. The American Petroleum Institute will
release its inventory report at 4:30 p.m. while the government
issues its data on Wednesday.
With so much production globally and healthy inventories,
rising geopolitical risks appear to be more muted, according to
Matt Smith, director of commodity research at ClipperData.
"These two elements are serving as not one, but two security
blankets for the market, assuaging any potential supply fears."
A Reuters survey found that OPEC oil output fell in
December, led by lower supply from Iraq. Yet, OPEC
production was pumping close to record amounts, signalling few
signs that producing members were choosing to reign in output
that has pushed prices to 11-year lows.
Iran said it was prepared to moderate its output and
exports, once sanctions are lifted, to avoid pressuring prices,
a senior National Iranian Oil Co official said.