Oil Settles Below $79 on Demand Outlook, Higher Dollar

Oil fell more than 2 percent Monday on concerns that a sluggish economic recovery will keep fuel demand low.

Investors scaled back their commodities holdings following a recent rally for raw goods. Equities fell and the U.S. dollar firmed against other currencies, after touching a 14-month low earlier Monday.

"There is selling spread out among a broad array of commodities," said analyst Brad Samples of Summit Energy in Louisville, Kentucky.

"The dollar is now up, after earlier being down, and that is helping to point crude oil lower," he added.

U.S. light, sweet crude for December delivery fell $1.82 to settle at $78.68, having earlier risen to as high as $81.58, near a one-year high of $82 a barrel reached on Oct. 21.

London Brent crude fell $1.66 to settle at $77.26 a barrel.

A stronger dollar makes oil costly for holders of other currencies. The dollar firmed as investors moved into more safe-haven assets like U.S. Treasury bonds, and away from commodities.

Caterpillar announced plans to permanently cut 2,500 jobs, after a sluggish economy curbed demand for its tractors and industrial equipment.

U.S. stock indices slid more than 1 percent as investors questioned whether third quarter corporate earnings were high enough to justify a recent rally in equities.

"The oil market is still focused on how the dollar and the stock markets are moving," said Phil Flynn, analyst at PFGBest Research in Chicago.

Nigeria's main militant group reinstated a cease-fire on Sunday in the oil-producing Niger Delta to allow for peace talks. That could free up more oil exports from the conflict-torn region whose output has been curtailed this year.

Warm weather may translate to less heating oil demand in the United States, the largest consumer. U.S. total heating demand will be nearly 23 percent lower than normal this week as temperatures average near to above normal in the Northeast and the Midwest, the National Weather Service projected on Monday.

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Oil fell in spite of some bullish data. U.S. crude oil was expected to average $74.00 a barrel in 2010, a Reuters poll showed on Monday, as almost one third of analysts surveyed increased their forecasts on the back of a stronger economic outlook.

Goldman Sachs said a nearly 10 percent jump in oil prices over the last two weeks was due to a rebound in diesel demand, and backed a view prices will hit $85 a barrel before 2009 is out.

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