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Oil hits near 3-month high on economic optimism

NEW YORK (Reuters) - Oil rose 3 percent on Monday to break above $80 a barrel, its highest price in nearly three months, as equity markets rose on positive economic sentiment and the dollar weakened.

Motorists are shown at gas pumps at a Chevron gasoline station in Burbank, California July 31, 2009. REUTERS/Fred Prouser

U.S. September crude settled up $2.39 at $81.34 a barrel, the highest settlement price since May 5. Crude looks to have broken out of the $70-$80 a barrel range it traded in for most of the last three months, triggering further buying.

In London, ICE Brent crude rose $2.64 to settle at $80.82.

U.S. stocks hit 10-week highs, following on from European stock markets which hit three-month highs on strong results from leading banks.

The U.S. dollar fell to a three-month low against a basket of currencies .DXY as investors moved to riskier assets, which supported oil prices. A weaker greenback makes commodities cheaper for holders of other currencies.

“With the still-weak dollar, people are more attracted to rising equity prices. That is the reason for the technical breakthrough today,” said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

Global manufacturing showed little risk of a double-dip recession as output in July grew in the United States and Europe and a rare contraction in China suggested Beijing was successfully reining in its hot economy.

The U.S. manufacturing sector grew last month for a 12th straight month and at a rate slightly better than expected.

STORM RISK

Tropical Depression 4 formed in the Central Atlantic Ocean, the U.S. National Hurricane Center said, which also supported oil prices. The latest forecasts predicted the storm would miss Florida and the oil-rich Gulf of Mexico.

The hurricane season is entering what in recent years has been a period of peak activity between August and early October. Atlantic storms sometimes enter the Gulf of Mexico, posing a threat to U.S. and Mexican oil infrastructure.

Some analysts warned oil’s rally may be short-lived if investors focus on the weak fundamental outlook following lackluster economic data.

Analysts polled by Reuters forecast that U.S. crude inventories fell last week as imports slipped from a four-year high and some companies briefly shut output in the Gulf of Mexico as Tropical Storm Bonnie approached. The American Petroleum Institute reports on Tuesday, and the U.S. Energy Information Administration will release its data on Wednesday.

Even with a draw, inventories will remain ample after a surprise jump of 7.3 million barrels in the previous week, largely due to swelling imports.

“I don’t see a reason for any more significant rise in oil prices,” said Christophe Barret, oil analyst at Credit Agricole.

“Fundamentals have not improved when you look at Chinese and U.S. economic indicators they look pretty weak,” Barret added.

However, the growing optimism among speculative investors on the outlook for longer-term oil prices was evident in data from the Commodity Futures Trading Commission (CFTC) on Friday. Money managers increased net long crude oil positions to the highest level since May on the New York Mercantile Exchange in the week to July 27, the CFTC said. (Graphic: link.reuters.com/fyh82n )

Additional reporting by Joe Brock in London, Robert Gibbons and Selam Gebrekidan in New York, and Alejandro Barbajosa in Singapore; Editing by Marguerita Choy

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