Oil fell sharply toward $87 a barrel on Monday as part of a broad-based commodities sell-off on concerns over the health of the U.S. economy and a recovery in the U.S. dollar.

At 1645 GMT, U.S. crude was down $1.41 at $87.19 a barrel, retreating from last week's all-time high of $90.07. London Brent crude was $1.25 lower at $82.56.

Dealers said the dollar's rebound from a record low against the euro alongside sliding world stock markets following a flurry of weak corporate earnings results was encouraging selling across energy and metals.

U.S. oil remains up around 10 percent since October 8, propelled by geopolitical worries and expectations that energy inventories will be tight during the Northern Hemisphere winter.

Analysts said news Kurdish rebels fighting Turkish troops near the Iraqi border could announce a cease-fire Monday evening added to Monday's losses.

Turkey had vowed Sunday to take tough action after the rebels killed 17 of its soldiers, raising fears of wider instability in the Middle East.

Kuwait's acting oil minister said Monday geopolitics and a lack of refining capacity was behind the recent surge in world oil prices and that a 500,000-barrels per day (bpd) output increase already agreed by OPEC would positively affect the market.

We think that the production rise by 500,000 bpd will affect positively (the price), Mohammad al-Olaim told reporters on the sidelines of an oil conference.

It is in our interest that the price is appropriate for consumers and producers.

However, others contend OPEC's output increase from November 1 is too little and too late.

To bring the oil price down from its current level, OPEC's members need to put more oil onto the market and allow commercial inventories to be replenished, the London-based Center for Global Energy Studies said in a report.

Meanwhile, speculators on the New York Mercantile Exchange crude oil market increased their net long positions in the week to October 16 as part of the rally that sent prices to a record $90 a barrel.

Crude longs rose to 87,988, the highest level since mid-August, from 69,190.

Analysts said the continued rise in the size of speculative net long positions made oil vulnerable to a correction.

The growing size of un-hedged positions in the market is a source of downside price risk, albeit strong underlying fundamentals should act to limit the extent of any potential correction, Barclays Capital said.

OPEC Energy