Oil drifts below $79 as dollar strengthens

LONDON // Oil eased below $79 a barrel on Tuesday, giving up some of the previous session's rally, as the US dollar edged higher and a weekly US inventory report was expected to show higher crude stocks. The market had rallied on Monday spurred by a weaker dollar and as better-than-expected US consumer spending data buoyed hopes of energy demand recovery in the world's largest oil consumer. US crude for December delivery fell 37 cents to $78.53 a barrel intraday. The contract settled $2.55 higher at $78.90 on Monday. Brent crude fell 34 cents to $78.42.

"Crude oil prices are down slightly as a slight strengthening in the dollar is forcing a modest retracement," said Edward Meir, analyst at MF Global, in a report. Gold also fell as investors locked in gains from a strong rally to a record high, while the dollar edged higher from its 15-month lows. World stocks slipped on Tuesday from the previous day's 2009 high. Expectations that the Federal Reserve would keep interest rates near zero for some time had been weighing on the dollar, fuelling gains in dollar-priced raw materials and related commodity shares.

Later on Tuesday, data on US industrial output, producer prices and redbook retail sales will provide the latest evidence of the health of the economy. US oil inventory data from industry group the American Petroleum Institute is due later on Tuesday and the government's figures follow on Wednesday. According to a preliminary Reuters poll, crude inventories probably rose. Oil has rallied from below $33 in December even though global demand fell year-on-year for the first nine months of 2009 according to the International Energy Agency and demand in wealthy countries has not improved much.

Still, some analysts expect demand strength from emerging markets to more than compensate, leading to higher fuel consumption down the road. "The market is increasingly expecting EM (emerging markets) demand to crowd out future OECD demand growth, and is putting upwards pressure on long-dated prices, leaving the market in a new higher trading range of $75 to $82," Goldman Sachs said in a report. *Reuters