UPDATE 6-Oil drops 2 pct as dollar rises; awaits jobs data

                                
 * U.S. jobless claims rise, retail sales disappoint
                                
 * Brent premium over U.S. WTI rises above $6/bbl
                                
 * Traders watching closely for fund rebalancing this week
                                
 * Coming up: Friday's U.S. employment report
 (Updates with settlement prices, market activity
                                
 By Gene Ramos
                                
 NEW YORK, Jan 6 (Reuters) - Oil prices tumbled more than 2
percent on Thursday to below $89 a barrel as a stronger dollar
and weaker U.S. equities deterred buyers.
                                
 Oil markets fell back as Wall Street dipped on
disappointing retail sales and investors turned cautious ahead
of Friday's U.S. employment report for December.
[ID:nN06128912]
                                
 Oil's losses added to a volatile start to trading in the
New Year, with crude extending December's gains and touching a
27-month high on Monday before investors began to reassess the
optimistic outlook for commodities in 2011.
                                
 Thursday saw further pressure on oil from gains in the
dollar against the euro which weighed on dollar-denominated
commodities. Recent U.S. data has painted a rosier economic
picture in contrast to worries about the euro zone's sovereign
debt crisis. [ID:nN06289262]
                                
 U.S. crude for February delivery <CLc1> settled down $1.92
at $88.38 a barrel in a second straight day of heavy volume.
Prices hit $92.58 on Monday, the first trading day of the
year.
                                
 As of 3:25 p.m. EST (2035 GMT), crude oil volume on the New
York Mercantile Exchange hit 972,774 lots, 6.7 percent above
Wednesday's level and 74 percent above the 30-day average,
according to preliminary Reuters data.
                                
 In London, ICE Brent crude for February <LCOc1> ended 98
cents lower at $94.52.
                                
 Brent's premium to U.S. crude touched $6.55 , the widest
level since it hit $6.57 on May 13, 2010. If the spread pierces
that seven-month high, it would be the widest spread since Feb.
12, 2009, when it dropped below $10 on an intraday basis.
                                
 (Graphic: http://link.reuters.com/taj25r)
                                
 Brent's strength has been spurred by continued strong Asian
demand and robust European product markets, while U.S. crude
has been pressured by an extended build in stockpiles at the
key delivery hub in Cushing, Oklahoma, despite a drop in
national stocks over the last five weeks.
                                
 "An influx of Canadian crude is finding its way into the
Cushing region and is likely to translate to a record supply at
the futures delivery point with next week's data release," said
Jim Ritterbusch, president of Ritterbusch & Associates in
Galena, Illinois.
                                
 Concerns about the Eurozone economy have undermined the
single European currency which fell 1 percent to a five-week
low against the dollar on Thursday. Across the Atlantic, there
is renewed optimism amid recent signs that the U.S. recovery is
moving at a faster pace.
                                
 In late trading, the U.S. dollar was up 0.74 percent
against a basket of currencies. <.DXY>
                                
 "It's all about the dollar strength and if the dollar keeps
rising you could see more profit-taking up here at these
levels," said Richard Ilczyszyn, senior market strategist at
Lind-Waldock in Chicago.
                                
 Dollar-denominated commodities become more or less
expensive for nondollar buyers depending on the relative
strength of the U.S. currency.
                                
 Revised forecasts in a Reuters poll showed expectations
that nonfarm payrolls jumped 175,000 after November's small
gain of just 39,000. [ID:nN05284674]
                                
 Unemployment was forecast to have edged down to 9.7 percent
last month, from 9.8 percent in November.
                                
 In the face of that forecast, uncertainty dogged financial
and commodity markets as the day's report of a rise in new
jobless benefit claims contrasted with Wednesday's data showing
a surprisingly big jump in private sector jobs.
                                
 U.S. claims for unemployment benefits rose more than
expected last week, adding to bearish sentiment, even though
the four-week average, considered a better gauge of underlying
labor trends, declined to a 2-1/2 year low. [ID:nN06111595]
                                
 Analysts said there could be some price distortion this
week as the big investment indexes rebalance their crude
futures weightings. [ID:nN04228799]
                                
 "The rebalancing period is well flagged and as such, some
of the recent moves in the market are likely to reflect the
anticipated rebalancing to some extent," said James Zhang, an
analyst at Standard Bank Commodities Research.
 (Additional reporting by Robert Gibbons in New York, Claire
Milhench in London; Alejandro Barbajosa in Singapore; editing
by Jim Marshall)