Oil prices were fluctuating around US$80 a barrel Thursday, as traders weighed the impacts of a surging dollar and rising U.S. crude inventories.

By early afternoon in Europe, benchmark crude for June delivery was up nine cents to $80.06 a barrel after dropping to as low as $78.87 in electronic trading on the New York Mercantile Exchange. The June contract lost $2.77 to settle at $79.97 on Wednesday.

Crude has dropped 10 per cent from an 18-month high of $87.15 a barrel earlier this week as an escalating debt crisis in Europe undermined confidence in the euro. Commodities priced in dollars, such as oil, become more expensive for investors holding euros as the U.S. currency strengthens.

"In our view, the sovereign debt worries actually provide a good reason for market participants to reconsider their long positions on oil futures," said JBC Energy analysts. "The price rally in recent months seems to have been largely based on the growth story in emerging economies, hoping that oil demand growth will finally turn out to be much stronger than widely expected by most agencies."

The euro fell to $1.2793 on Thursday from $1.2827 late Wednesday in New York.

"The market is realizing the problem in Europe is not easy to fix," said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore. "If the euro collapses, that's really going to push crude down."

Signs of tepid U.S. crude demand also weighed on oil prices. The Energy Information Administration said Wednesday that crude inventories rose by 2.8 million barrels last week while analysts had expected an increase of only 1.5 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Inventories of gasoline and distillates also rose.

"The price of oil has ... shed seven dollars in two days. We have repeatedly said that the price rally was previously driven by financial demand and not by physical scarcity on the oil market," said a report from Commerzbank in Frankfurt.

In other Nymex trading in June contracts, heating oil was steady at $2.1845 a gallon and gasoline slid 0.04 cent to $2.2200 a gallon. Natural gas fell two cents to $3.971 per 1,000 cubic feet.

In London, Brent crude gained 13 cents to $82.74 on the ICE futures exchange.

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Associated Press writer Alex Kennedy in Singapore contributed to this report.