The dollar gave up most of its earlier gain against a basket of currencies, boosting the appeal of oil and commodities to investors. European stocks firmed and U.S. equity futures pointed to a higher opening.

“It’s making some progress back up, largely due to the dollar,” said Rob Montefusco of Sucden Financial. “At the same time, we haven’t seen demand pick up and we need that to draw strength back into this sector at the moment.”

U.S crude was up 8 cents to $66.10 a barrel by 1308 GMT, after earlier falling as far as $65.41. London Brentwas down 11 cents to $65.00.

Iran test-fired a type of missile on Monday which defence analysts have said could hit Israel and U.S. bases in the Gulf region, state television reported.

The drills coincide with increased tension in Iran’s nuclear dispute with the West, after last week’s disclosure by Tehran that it is building a second uranium enrichment plant.

Tensions over Tehran’s nuclear programme have supported oil prices in recent years. The country is the second-largest oil producer in the Middle East.

In late 2008, Iran threatened to block the Strait of Hormuz, through which about 40 percent of the world’s globally traded oil passes, when tensions rose in another row with the United States around the nuclear work.

Even so, sluggish oil demand, reinforced by some lacklustre economic data from the United States last week, continued to command investors’ attention.

“The Iranian situation is not having much influence. If it was, we’d be back towards $70 again,” said Christopher Bellew, a broker at Bache Commodities in London.

Oil prices posted their largest weekly decline in around 2-3 months last week, pressured by government data showing U.S. crude oil inventories had risen, suggesting demand remains weak.

U.S. durable goods orders dropped by the largest amount in seven months while a rise in new home sales was less than forecast, according to data from the U.S. Commerce Department on Friday.

Sept 28 (Reuters)

Saudi Arabia’s oil minister, Ali Naimi, has indicated that while demand is beginning to pick up, inventories remain dangerously high. Therefore, it would be best for the cartel to “stay its course” by continuing to adhere to previous production cuts until demand stabilizes.

After soaring above $147 a barrel last summer the price of oil tumbled more than 80% to a four-year low of $32.70 a barrel in February. To combat the sharp decline in prices, OPEC has lowered its production quotas by 4.2 million barrels per day (bpd) – about 5% of global demand – since September.

Since February, oil prices have recovered, climbing to their current level above $60 a barrel. But both Naimi and industry analysts have warned that the rally has more to do with market sentiment and the potential for a recovery than it does fundamentals.

“The price rise is a function of optimism that better things are coming in the future,” Naimi told reporters earlier this week.

The International Energy Agency (IEA) estimates global oil consumption will fall by 2.6 million bpd this year. That would be the biggest drop since 1981.

Naimi says that world crude inventories – at current levels – would be sufficient enough to meet about 62 days of global demand. OPEC members would like to see them fall to about 52 to 54 days worth of demand.

An increase in OPEC production “will not happen until we are sure that global inventories return to their normal levels,” Naimi told the Arab daily Al-Hayat.

U.S. crude oil inventories rose to the highest level in two decades earlier this month. However, Naimi did note that demand in Asia, particularly China, seems to be accelerating and crude prices could reach $75 a barrel by the end of the year.

Still, analysts are urging caution, as production quota compliance among OPEC nations is beginning to wane. Production compliance among OPEC nations reached 85% in March – an impressive level by historical standards. Members only delivered on 78% of the promised cuts in April as prices recovered.

Saudi Arabia, OPEC’s largest and most influential producer, actually pumped below its target level in April, but other members have been cheating. Iran, OPEC’s second-biggest producer, accounted for 410,000 bpd of the overproduction last month, while Angola exceeded its target by 170,000 bpd and Venezuela overproduced 130,000 bpd the IEA reported.

“Lagging quota compliance by the non-Gulf Arab states – hovering around 50% – has hamstrung any real discussion of a potential cut to accelerate the drawdown of the glut,” PFC Energy analyst David Kirsch said in a report today. “Purported requests by Angola to revise or suspend its quota, as well as moves by Venezuela to certify a higher production figure leave any proposal for further output restraint effectively stillborn.”

Source: OPEC to Maintain Production Levels at Thursday Meeting

Oil was higher on Wednesday, but cut back early gains after U.S. inventory data showed fuel stocks in the world’s largest energy consumer rose sharply last week.

U.S. crude for January delivery touched $45 a barrel on Tuesday, recovering from an overnight slump by more than 4 percent, but by 1618 GMT oil had trimmed gains to trade at $43.07, up $1.00.

London Brent crude was up 48 cents at $42.04.

U.S. crude oil inventories rose by 400,000 barrels to 320.8 million, with distillate and gasoline stocks also up, according to the U.S. Energy Information Administration (EIA). Refinery run rates rose to 3.1 percent to 87.4 percent.

“If you were an oil bear and you were looking for a Christmas gift, you got everything you wanted in this report,” said Phil Flynn, analyst at Alaron Trading in Chicago.

Rising fuel stocks in the United States and other consumer nations have heightened fears of slowing demand for fuel as the global economic slowdown starts to cut into consumption.

The market now looks to OPEC’s Dec. 17 meeting in Algeria where the group is expected to cut as much as 2 million barrels a day in a bid to shore up prices which have fallen by more than $100 dollars since peaking above $147 a barrel in July.

Russia’s energy minister on Wednesday said OPEC members were preparing a “significant cut” in oil production, and that Russian output was likely to decline in 2008 despite government attempts to stimulate production.

Sergei Shmatko also said Russia, the largest oil producer outside the producer group, would make its own proposal at the Algeria meeting, which it will attend as an observer.

“Sentiment rules the oil market at the moment, with most traders tracking equities,” said Andrey Kryuchenkov, vice president of commodities research at VTB Bank.

“A lot of people will wait to see how much OPEC will but by next week, and then whether then can comply with the quota cuts.”

China’s November crude oil imports hit a year low, as the world’s secong-largest oil user shipped in 13.36 million tonnes last month, official data showed, a 14.6 percent cut in daily volumes from October and 1.8 percent down on November last year.

U.S. weekly inventory report shows fuel stock rise sharply… Year-on-year rise in U.S. gasoline purchases- Mastercard… Russia says OPEC to make “significant cuts”

Chris Baldwin
LONDON, Dec 10 (Reuters)