Bernanke, in a second day of congressional testimony, repeated his statement that the Fed stood ready to take more action should the economy weaken further. But he also said that inflation was higher now than it was late last year, so the Fed is not ready yet to take action.

That caveat boosted the dollar, which erased losses against most major currencies. This, in turn, prompting selling of oil futures as a stronger greenback encourages investors to cut down on holdings of risky assets.

"The latest headlines on Bernanke's statement to the Senate have caused the euro to pare gains against the dollar and that pulled down crude futures as well," said Stephen Schork, editor

of the Schork Report in Villanova, Pennsylvania.

Wall Street also extended a decline after Bernanke's latest comments and a broad array of commodities fell on the dollar recovery, although gold hit another record on safe-haven

buying.

By 1:35 p.m. EDT (1735 GMT) US crude for August delivery slid $2.90 to $95.15 a barrel, after rising to $98.88 early.

In London, Brent August crude fell 49 cents to $118.29 a barrel, off a session high of $119.40 and ahead of its expiration at the session's close.

Brent's premium against US crude, also known as West Texas Intermediate, ballooned to a record $23.57, erasing the previous high of $23.34 hit on June 15, according to Reuters data.

Crude slid on economic pessimism after Moody's Investor Service warned late Wednesday that it might strip the United States of its gold-plated credit rating in coming weeks if the $14.3 trillion limit on America's borrowing was not raised.

Investors were jittery as negotiations between the White House and Congress remained heated over a deal that would allow the borrowing limit to be raised by Aug. 2.

In London, North Sea supply issues beset Brent crude in recent days, but price pressure eased somewhat on Thursday after news that the 200,000-barrels-per-day Buzzard oil field, Britain's largest, should turn to full output in August.

Oil prices rebounded early Thursday after US data showed a drop in initial jobless claims last week and a surprise retail sales rise in June, shoring up hopes for better oil demand.

First time filings for state unemployment insurance fell 22,000 last week to 405,000, better than expected, but above the 400,000 benchmark for a stable labor market.

Retail sales rose slightly, thanks to higher auto dealers receipts.

On other market factors, lingering worries about the euro zone debt crisis continued to keep investors cautious. Despite the day's losses, crude futures still retain a big portion of gains recouped after prices fell to four-month lows following the June 23 announcement from the International

Energy Agency of a coordinate move to release 60 million barrels from members' emergency reserves.

US crude was still up about 5 percent while Brent crude retained gains of about 10 percent after rebounding following the IEA action.