Oil prices fell further from 27-month highs on Wednesday as a stronger dollar sapped investor risk appetite for commodities, despite signs of tighter oil supply fundamentals.

Oil staged a sharp rally in late December, helping to make commodities the top performing asset class in 2010 but prices have since retreated as investors opted to take profits.

U.S. crude for February fell 72 cents to $88.66 a barrel by 1007 GMT (5:07 a.m. ET), and were around 4 percent below the 27-month peak hit on Jan 3. The U.S. dollar index rose by around 0.2 percent on Wednesday.

ICE Brent for February fell 50 cents to $93.03 a barrel but was still well supported relative to the U.S. crude benchmark and held a near $4 premium.

The price had gone up too high. There was quite a flow of funds coming in and people have been taking profits. It's not unexpected -- we've got all that spare capacity upstream and downstream and still high stocks even though there have been some draws, said Roy Jordan, analyst at Facts Global Energy.

Losses on Wednesday came despite data late in the previous session showing a much larger-than-expected 7.5 million barrel drop in crude inventories in the final week of 2010, according to industry group American Petroleum Institute.

This normally bullish news was partially tempered by gains in U.S. fuel stockpiles such as gasoline and distillates.

Data from government statistics body U.S. Energy Information Administration, generally seen as a more authoritative source, will follow on Wednesday at 1530 GMT.

fell by nearly half a percent on Wednesday as early losses in European shares weighed.

European industrial orders rose by 14.8 percent in October from the previous year but less than a forecast 17 percent rise in a Reuters poll.

(Additional reporting by Alejandro Barbajosa in Singapore; editing by Keiron Henderson)