Perth - Oil fell on Tuesday, but clung to most of its previous session gains of 3%, hovering above $78 a barrel, as traders took profit ahead of the release of key US indicators and a weekly fuel inventories report.
Oil prices rallied on Monday as a weaker dollar encouraged hedging activities, while better-than-expected US consumer spending data also buoyed hopes of energy demand recovery in the world's largest oil consumer.
But with a lengthy calendar of economic data due on Tuesday, analysts said traders were expected to take a cautious stance and would hesitate to drive oil prices higher despite Asian equities hitting a 15-month high.
US crude for December delivery fell 30 cents to $78.60 a barrel by 04:05 GMT. The contract settled $2.55 higher at $78.90 on Monday. London Brent crude fell 30 cents to $78.46.
"The guidance is really going to come from the dollar and the bunch of US economic data due later tonight," said David Moore, a commodities analyst at the Commonwealth Bank of Australia.
Markets will watch for any comments on currencies when US President Barack Obama and Chinese President Hu Jintao make statements, while a string of economic data from the United States, including industrial output, producer prices and redbook retail sales, will be at the top of traders' watchlists.
Asian stocks rose to more than 15-month highs after US Federal Reserve Chairman Ben Bernanke repeated the central bank was likely to hold interest rates at very low levels for some time, keeping the dollar pinned near 15-month lows and gold close to record highs.
Run ahead of demand
Still, some analysts remain downbeat on oil prices in the near term and cautioned that crude oil's recent rally had run ahead of demand fundamentals.
The International Energy Agency (IEA) has not seen much recovery in actual oil demand in OECD countries and the pace of global recovery may not justify Opec raising production at its next meeting, the agency's executive director said on Tuesday.
"We are concerned that economic recovery expectations are very high. While that is true in China and India, in OECD countries like Europe and Japan, we have not seen much of an actual recovery in oil demand," Nobuo Tanaka told Reuters on the sidelines of an energy conference in Singapore.
Traders will also keep their eyes peeled for US fuel inventory data, with industry group American Petroleum Institute (API) releasing its report later on Tuesday and the government agency US Energy Information Administration (EIA) to follow with its own figures on Wednesday.
US crude oil inventories rose last week as imports probably edged up, despite minimal disruptions in offloading operations in the wake of Tropical Storm Ida, a preliminary Reuters poll ahead of weekly inventory data showed on Monday.
Distillate supplies, which include heating oil and diesel, were forecast down 800 00 barrels on average.
While the recovery in oil demand in the world's No. 1 energy consumer appears choppy, oil use in China, the world's second-largest oil-consuming nation, is on a gradual upswing.
Fuel stocks held by China's top two oil firms CNPC and Sinopec Group fell for the third month in a row in October, showing more evidence of a gradual revival in oil demand.
- Reuters