Oil slips with equities on economic concerns

NEW YORK Mon Aug 30, 2010 4:34pm EDT

NEW YORK (Reuters) - Oil prices slipped on Monday as investor unease about a stalled economic recovery weighed on equities and energy markets and a slightly stronger dollar helped oil break a string of three days of gains.

Investors were cautious ahead of a report on manufacturing activity due on Wednesday from the Institute of Supply Management and the ISM's report on the services sector on Friday, when the government's closely watched August nonfarm payrolls report also arrives.

U.S. crude for October delivery fell 47 cents, or 0.63 percent, to settle at $74.70 a barrel, after trading from $74.17 to $75.58.

ICE Brent for October fell 5 cents to settle at $76.60 a barrel.

"The complex came under downside pressure at the start of the week as it continues to spend much of its time trailing the stock market and the euro to a lesser extent," Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, said in a research note.

EQUITIES SHAKY

U.S. stocks fell as remarks from U.S. President Barack Obama on the economy was not able to ease investor anxiety over the slow pace of recovery. .N

Obama said he and his economic advisers are discussing additional steps to generate job growth, such as more tax cuts for businesses.

Neither oil nor equities markets received much support from news that U.S. consumer spending rose in July. Incomes rose, but less than expected.

The yen rose broadly after the Bank of Japan's decision to expand loans to banks disappointed investors who had looked for more aggressive measures to curb the yen's strength. But the dollar index .DXY was stronger and the euro was weaker versus the dollar, but in seesaw trading.

A stronger dollar can pressure oil prices because countries using other currencies must pay more for dollar-denominated oil while the currency producers are paid gains value.

U.S. oil inventories near record highs and lackluster demand amid persistent unemployment helped send oil prices last Wednesday to a $70.76 a barrel intraday low, the weakest since front-month prices fell to $70.75 on June 8.

But oil futures ended the week with three higher settlements, bouncing off technical support indicating an oversold condition and receiving some lift on Friday from Federal Reserve Chairman Ben Bernanke's speech saying that the central bank was ready to act to help a faltering economy.

"We rallied last week when crude was oversold technically and the factors that drove prices down below $71 are still there. The fundamental picture is still weak, with inventories near record levels and lackluster demand," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

The U.S. Energy Information Administration revised its estimate for U.S. oil demand in June lower, although demand was still higher than year ago.

Ahead of the week's oil inventory reports from government and industry, a preliminary Reuters survey of analysts on Monday yielded a forecast for crude stocks to have risen last week by 1.3 million barrels on higher imports. <EIA/S>

Distillate stocks, which include heating oil and diesel fuel, were expected to be higher, while gasoline inventories were seen slightly lower.

STORMS CHURNING

Oil markets continued to eye tropical weather systems in the Atlantic. The U.S. National Hurricane Center was monitoring three tropical systems in the Atlantic basin, but computer models showed them steering clear of oil and gas producing areas in the Gulf of Mexico.

A storm-related supply disruption might help to undo Brent crude futures' unusual premium to U.S. crude futures.

Brent's premium to U.S. crude was at $1.90 at settlement on Monday, after rising to more than $2 a barrel on Friday, its highest since May, according to Reuters data.

Analysts have credited Brent's premium to U.S. crude to high inventories in the United States, coupled with relatively tight supplies of North Sea crude due to maintenance.

(Additional reporting by Gene Ramos in New York, Barbara Lewis in London and Alejandro Barbajosa in Singapore; Editing by Marguerita Choy)