Oil slips below $77 on dollar rise, equities slide

RELATED NEWS Oil steady at below $78, traders seek fresh cues Oil falls more than $2 on equities, dollar US dollar rebounds from 15-month low Oil above USD 79 on dollar, US consumer data

Oil slipped nearly 1% to below USD 77 on Friday as a stronger dollar weighed on prices and falling equities raised concern about the economy and the outlook for energy demand.

US crude for December delivery fell 54 cents to USD 76.92 a barrel by 1:53 EST (1853 GMT), ahead of its expiration later in the session. US crude for January delivery was down 36 cents at USD 77.69.

London Brent crude slipped 24 cents to USD 77.40.

"Oil is clearly still tied to broader financial markets and seeing losses due to a stronger dollar and a drop in stock prices," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

Investors have scoured economic data in recent months for signs of a recovery that might boost global energy demand.

US stocks fell on Friday after worse-than-expected quarterly results from computer maker Dell Incorporation and homebuilder D.R. Horton Incorporation underscored that the road to recovery would not be smooth.

The dollar rose for a second straight session on Friday as investors cut exposure to risky assets and high-yield currencies ahead of a holiday-shortened week in the United States. A stronger dollar makes dollar-denominated commodities like oil more expensive for holders of other currencies and tends to pressure crude prices.

Oil has traded mainly between $75 and $80 a barrel in recent weeks as mixed economic signals failed to give a clear outlook for crude.

"To rally, we'd need to see more significant signals of economic activity perking up," McGillian added.

SWELLING INVENTORIES

Valero Energy Corporation said on Friday it will permanently shut its Delaware City, Delaware, refinery because of weak economic conditions, the latest sign that refiners in the US are struggling against weak fuel demand and thinning margins.

"If there's ever been a time to mothball a refinery, it's probably now, with utilization rates below 80 percent. I wouldn't be surprised to see additional closures," said Peter Beutel, president at Cameron Hanover in New Canaan, Connecticut.

A lack of demand for oil products has led to very high inventory levels being stored at sea as well as on land. Volumes in floating storage are estimated to be around 90 million barrels, more than total global daily oil consumption.

Analysts say the purchase of products for floating storage, often a financial strategy where the buyer is able to sell the products for a profit at a later date, has created the illusion of improved demand.

"By the end of the winter there is likely to be as much distillates afloat as in the total US at the end of winter 2007 and we expect that it will be more and more difficult for some of the Wall Street commodity banks to avoid mentioning the subject and to continue to hide the floating storage fill-up as 'demand from emerging economies,'" said Olivier Jakob, oil analyst at Petromatrix, in a research note on Friday.