Oil falls after 3 pct rally, supply build-up seen
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Oil falls after 3 pct rally, supply build-up seen UPDATED 04 Aug 2009 | 06:37  
Oil falls after 3 pct rally, supply build-up seen

By Sambit Mohanty

SINGAPORE (Reuters) - Oil fell $1 and dropped back below $71 on Tuesday, paring some of the previous day's 3 percent gain, as worries about a rise in U.S. crude inventories offset optimism from positive U.S. and Chinese manufacturing data.

The U.S. dollar's fall to its lowest level this year helped boost U.S. crude oil futures on Monday, but with the dollar hovering near this level there was little new direction from the currency markets.

"The strong rally in oil prices over the past few days gave investors an opportunity to take some profits. There are also signs of increasing supplies," said Victor Shum, a Singapore-based analyst at Purvin and Gertz.

"And we should remember that we are going to enter a period of slow autumn demand. With supplies rising, it will not be surprising for oil to pull back below $70," he added.

U.S. light, sweet crude fell 69 cents at $70.89 a barrel by 0619 GMT, after having fallen earlier by as much as $1.06. ICE Brent crude fell 37 cents to $72.18 a barrel.

Cautious statements from UBS, which posted a another big quarterly loss of 1.4 billion Swiss francs on Tuesday, also dampened investors' risk appetite, some analysts said.

Monday's gains brought oil prices, still less than half the record high of over $147 hit in July 2008, within sight of the year's high of $73.38 set in June.

Some analysts said the strong rally in equities -- global stocks surged to a nine-month high on Monday -- and increasing signs of a global economic recovery would limit the downside for the oil market as investors' appetite for risk rises.

On Tuesday, Asian stocks climbed to an 11-month high on hopes a V-shaped recovery may be forming in the United States.

"Oil will struggle to break $75 but there might be a support for the market at current levels because of the strong PMIs," said Victor Say at Informa Global Markets.

The U.S. manufacturing sector continued to shrink in July, but at a slower pace than in June and more slowly than expected, according to Institute for Supply Management data, while Chinese PMI data showed a fourth straight month of growth.

The dollar index, a gauge of the greenback's performance against six other major currencies, stood around 77.662, little changed from late U.S. trade on Monday when the index fell as far as 77.451, its lowest since September 29.

The market is looking to take a cue from weekly U.S. crude inventory data due later from the American Petroleum Institute and on Wednesday from the Energy Information Administration.

According to a preliminary Reuters poll, analysts expect a 1 million barrel rise in crude stocks last week, a 1.1 million barrel rise in distillate stocks and a 1.6 million barrel draw in gasoline stocks.

Output by 11 members of OPEC rose slightly in July, lowering its compliance rate to 71 percent of its agreed supply curbs compared with 72 percent in June, a Reuters survey showed

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