* U.S. dollar rallies to 14-year high
* Crude benchmarks earlier hit highest levels since July 2015
* OPEC, non-OPEC cut deal took effect on Sunday
* Libya raises oil production to 685,000 bpd
* Oman notifies customers of crude term volume cut in March
* Russia's Dec oil output unchanged at 11.21 million bpd (Adds latest prices, fresh quotes)
By Scott DiSavino
NEW YORK, Jan 3 (Reuters) - Oil prices turned negative after earlier hitting 18-month highs on Tuesday, the first trading day of 2017, as the U.S. dollar rallied to its highest since 2002.
Traders said crude prices were buoyed earlier in the day by hopes that a deal between OPEC and other big oil exporters to cut production, which kicked in on Sunday, will drain a global supply glut.
Brent futures LCOc1 were down 95 cents, or 1.7 percent, at $55.87 a barrel by 12:05 p.m. EST (1705 GMT). U.S. West Texas Intermediate (WTI) crude CLc1 fell 95 cents, or 1.8 percent, to $52.77 per barrel.
Earlier in the session, both oil contracts hit their highest levels since July 2015 with Brent reaching $58.37 and U.S. $55.24, before paring gains on the strong U.S. dollar.
"The dollar strength is certainly weighing on oil prices," said Andrew Lipow, president of energy consulting firm Lipow Oil Associates in Houston, noting U.S. stock markets .SPX also pared their gains from earlier in the day with the dollar rally. dollar .DXY hit a 14-year high against a basket of other currencies after data showed U.S. manufacturing activity grew more than expected in November. stronger greenback pressures demand for dollar-denominated crude, making barrels more expensive for users of other currencies.
Oil futures exchanges were closed on Monday for New Year public holidays.
"WTI was off to a strong start to this New Year with some support developing off of reports that Kuwait and Oman are already in progress of enacting agreed upon cuts," Jim Ritterbusch, president of Chicago-based energy advisory firm Ritterbusch & Associates, said in a note.
Jan. 1 marked the official start of a deal agreed by the Organization of the Petroleum Exporting Countries and other exporters such as Russia to reduce output by almost 1.8 million barrels per day (bpd). Middle Eastern oil producer Oman told customers last week that it would cut its crude oil term allocation volumes by 5 percent in March. Libya, one of two OPEC countries exempt from the output cuts, has increased its production to 685,000 bpd, from around 600,000 bpd in December, an official at the National Oil Corporation said on Sunday. Russia's oil production in December remained unchanged at 11.21 million bpd, near a 30-year high, but it was preparing to cut output by 300,000 bpd in the first half of 2017 in its contribution to the accord.