By Emma Farge
'Rising oil production capacity in the US Gulf also weighed on oil prices' - Analysts.
Oil prices fell towards $78 a barrel on Tuesday, reversing an earlier rally to the highest level since early May, as negative US macroeconomic data and falling equities dampened buying interest for crude.
US consumer confidence fell in July to the lowest level since February, prompting US stocks to give up short lived gains.
US equities are seen as a broad indicator of the future oil demand picture in the world's top consumer and the intra day fall helped revive persistent fears of a double dip recession.
US oil prices fell 62 cents to $78.36 a barrel by 1425 GMT after earlier trading at $79.69 a barrel - the highest intraday level since May 6. ICE Brent fell 55 cents to $76.95 a barrel by the same time.
Harry Tchilinguirian, head of commodity strategy, BNP Paribas, said: "The reaction is on the release of the (confidence) data...The question is now how the market views the potential for future Fed quantitative easing, given the weaker numbers."
He added that expectations the United States will start printing more money have increased the appeal of riskier asset classes such as oil and equities.
Rising oil production capacity in the US Gulf after the Tropical Depression Bonnie also weighed on oil prices, analysts said.
Oil prices are now at a critical juncture and it remains to be seen if they will break into a new range above the $70-$80 a barrel area where they have traded since early June, analysts said.
Eugen Weinberg, head of commodities research, Commerzbank, Frankfurt, said: "It's a mixed set of signals. The market is considering a move above $80 and if they do it will be seen as a positive sign. Should they stay below $80 a further drop cannot be ruled out as people will point to a double dip recession and a Chinese slowdown."
Some technical analysts, who study price charts for clues to future direction, think oil prices could soon challenge $80 a barrel following a breach of the key 200 day moving average level last week.
Industry group the American Petroleum Institute will publish data on US inventories at 2030 GMT on Tuesday, followed by government statistics from the Energy Information Administration on Wednesday.
US crude oil inventories probably fell 1.8 million barrels last week, a Reuters survey showed, while supplies of distillate fuel, including diesel, may have climbed for the ninth consecutive week and gasoline for the fifth, even as summer demand peaks.
Iran said on Monday it was ready to return to talks on a nuclear fuel swap, a surprise that came shortly after the European Union agreed tougher sanctions, including a block on oil and gas investment.
Weinberg said: "There is some suggestion that Iran might be giving up. This could lead to a decrease in the risk premium in the market but it's not clear yet."