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Thu 19 Nov 2009 04:22 PM

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Oil slips towards $79 on dollar, demand concern

Doubts about pace of demand recovery in US dampens market sentiment.

US crude futures drifted lower to hover beneath the key $80 a barrel mark on Thursday as gains in the dollar weighed on prices and doubts about the pace of demand recovery in the United States dampened sentiment.

The dollar inched higher against the euro to move up from 15-month lows earlier in the week while sluggish demand for distillates due to mild weather in the United States capped price gains.

US crude prices for December delivery fell 46 cents to $79.12 a barrel by 1010 GMT, after settling up 44 cents on Wednesday.

Brent crude for January delivery fell 42 cents to $79.05 a barrel after trading within cents of the year high of $80.26 on Wednesday.

"We have seen some good gains in the last few days and we are very close to important pyschological levels so it's a slight retracement," said oil futures broker Tony Machacek at Bache Financial.

U.S. oil prices rose above the key $80 a barrel level in the previous session after government data showed a drop in both crude and product inventories in the world's largest oil consumer.

Crude stocks fell a more-than-expected 900,000 barrels and while distillate stocks including diesel and heating oil fell 300,000 barrels this was less than analyst projections.

But analysts said mild weather in the United States and high global oil products stocks held in storage on land and on floating vessels was set to limit potential upside on oil.

"Temperatures are unseasonably mild in the United States and crude is holding the range between the high $70s and low $80s," said Peter McGuire, managing director of CWA Global Markets.

On the supply side, the Organization of the Petroleum Exporting Countries should hold oil output steady when it meets in December as current prices do not suggest the need to change supply, the head of Libya's National Oil Corporation said on Wednesday.

Oil prices have rallied up from lows of around $33 a barrel last December as investors have used liquidity pumped out by central banks to take bets on the pace of fuel demand recovery and gains in the oil market.

A depreciating dollar has also lured in investors who are looking to use tangible assets such as oil as a hedge.

"Oil is very close to other assets and moves will depend on the dollar," said Machacek.

Since hitting a high of $82 a barrel in October, prices have traded in a narrow $7 band.

Implied oil volatilities are at their lowest since February 2008, back near levels before last year's surge to a record high.

Analysts said weekly US jobless claims due at 1330 GMT could give prices a steer later. (Reuters)

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