* U.S. dollar index at one-month high over Chinese growth concerns
* Middle East tensions dashes chance of OPEC deal to curb glut
* Brent/WTI widens after news of BP Whiting refinery planned work
* Coming up: API U.S. oil inventory report 4:30 p.m. (2130 GMT) (Updates with settlement prices, other background, adds quote)
By Catherine Ngai
NEW YORK, Jan 5 (Reuters) - Oil prices dropped over 2 percent towards its 11-year low on Tuesday, as traders shrugged off growing tensions between two of the world's biggest oil producers and focused instead on a stronger U.S. dollar and swelling U.S. crude inventories.
Relations between Saudi Arabia and Iran collapsed in acrimony this week after the Kingdom's execution of a Shi'ite cleric set off a storm of protests in Tehran. On Tuesday, Saudi state news agency reported that four armed men set on fire a bus transporting workers in the nation's oil-producing Eastern Province. urn:newsml:reuters.com:*:nL8N14P39D
Instead of fanning fears of a disruption in supplies, however, some delegates from the Organization of the Petroleum Exporting Countries said the rift could exacerbate oversupply concerns by quashing already faint hope that OPEC could one day agree to cut output. urn:newsml:reuters.com:*:nL8N14P2QH
The oil market fell under additional pressure from a firmer U.S. dollar .DXY , which gained 0.5 percent to hit a one-month high as traders sought safer havens, and signs of a further swell in already record U.S. inventories. USD/
Brent crude prices LCOc1 fell 80 cents to settle at $36.42 a barrel. Prices hit an 11-year low of $35.98 a barrel just before Christmas, capping a year where the benchmark's value dropped by more than a third.
U.S. West Texas Intermediate (WTI) crude CLc1 slipped 79 cents to settle at $35.97 a barrel.
The discount for U.S. WTI crude versus Brent CL-LCO1=R widened by some 25 cents after a report that BP Plc BP.L was conducting planned work at a large crude unit at the 413,5000 bpd Whiting, Indiana, refinery. urn:newsml:reuters.com:*:nL1N14P1ID
That should back more crude into the delivery point for WTI futures at Cushing, Oklahoma, where stockpiles rose nearly 500,000 barrels last week to 65.4 million barrels, according to Genscape.
Crude inventories were forecast to have risen last week for the second straight week. The American Petroleum Institute will release its inventory report at 4:30 p.m. while the government issues its data on Wednesday. EIA/S
With so much production globally and healthy inventories, rising geopolitical risks appear to be more muted, according to Matt Smith, director of commodity research at ClipperData.
"These two elements are serving as not one, but two security blankets for the market, assuaging any potential supply fears."
A Reuters survey found that OPEC oil output fell in December, led by lower supply from Iraq. urn:newsml:reuters.com:*:nL8N14P18C Yet, OPEC production was pumping close to record amounts, signalling few signs that producing members were choosing to reign in output that has pushed prices to 11-year lows.
Iran said it was prepared to moderate its output and exports, once sanctions are lifted, to avoid pressuring prices, a senior National Iranian Oil Co official said. urn:newsml:reuters.com:*:nL3N14P498