UPDATE 7-US oil pares losses, Brent up after Mexico explosion

                                
 * Blast rips through Mexico oil refinery
                                
 * Dollar index rises, equities slip on European bank fears
                                
 * Tropical Storm Hermine has not disrupted Gulf oil output
                                
 * U.S. Conference Board job index falls in August
                                
 (Recasts, updates prices, market activity)
                                
 By David Sheppard
                                
 NEW YORK, Sept 7 (Reuters) - U.S. crude oil pared losses
and Brent crude turned positive after a deadly explosion ripped
through a Mexican oil refinery, raising concerns that Mexico, a
top U.S. crude supplier, would have to import more fuel.
                                
 U.S. product futures surged after news of the blast at the
275,000 barrel-per-day Cadereyta plant, Mexico's third biggest
and most sophisticated refinery. (Graphic:
http://link.reuters.com/xuz89n )
                                
 Mexico, which already relies on imports for more than 40
percent of domestic gasoline demand, could now be forced to
boost fuel imports significantly.
                                
 "This should increase Mexico's demand for imports from the
United States - one of the key things that will eventually drag
down record U.S. oil product stocks is export demand," said
Andy Lebow, senior vice president of energy at MF Global in New
York.
                                
 "Gasoline and heating oil have definitely been supported by
news," Lebow said. "Crude is also getting dragged along. Even
though a refinery going offline should mean lower demand for
crude, the broader market is not going to ignore rising product
prices."
                                
 U.S. benchmark October crude <CLc1> had been down almost $2
a barrel on concerns about European banks. But after news of
the explosion, U.S. crude pared losses to settle at $74.09,
down just 51 cents a barrel from Friday's close, having traded
in a range of $72.63 to $74.63 a barrel. U.S. crude did not
trade on Monday because of the Labor Day holiday.
                                
 Brent crude <LCOc1> was up 57 cents from Monday's close to
$77.44 at 1926 GMT.
                                
 U.S. RBOB gasoline futures <RBc1> rose from a session low
of $1.8816 a gallon to a peak of $1.96661 after the blast. The
contract settled at $1.9329 a gallon, up 0.7 percent. Heating
oil <HOc1> rose 0.8 percent to settle at $2.0743 a gallon.
                                
 Mexico's state oil company Pemex [PEMX.UL] confirmed at
least one person was killed in the blast, which it said
occurred following a leak in a compressor at the diesel-making
unit at the refinery that resulted in a brief fire.
[ID:nN0786648]
                                
 Two other workers were severely burned and eight suffered
minor injuries in the explosion.
                                
 BANKING WORRIES
                                
 U.S. and European stock markets fell on banking sector
worries after the Wall Street Journal reported bank stress
tests of major lenders in Europe understated their holdings in
potentially risky government debt.
                                
 Rob Montefusco, a trader at Sucden Financial in London,
said the news had sparked a flight from riskier assets like
commodities that weighed on oil prices.
                                
 "Equities came off, the dollar is strong -- it's pretty
much a knock-on effect," Montefusco said.
                                
 The dollar was up 0.6 percent against a basket of
currencies as traders shed riskier assets <.DXY>. A strong
dollar makes crude more expensive for other currency holders.
                                
 Brent crude in London remained at an atypical premium to
U.S. crude as brimming inventories weighed on the U.S.
benchmark <CL-LCO1=R>.
                                
 The premium hit its highest since mid-May, bolstered by
recent maintenance work in North Sea fields and strong Russian
Urals crude prices. [ID:nN07240177]
                                
 A gauge of the U.S. job market declined in August,
underscoring concerns about prospects for oil demand.
                                
 The Conference Board, a private research group, said its
Employment Trends Index fell to 96.7 in August from a revised
97.4 in July, signaling U.S. employment growth may continue to
slow in coming months.
                                
 The U.S. Labor Day holiday on Monday marked the end of the
country's driving season, when gasoline demand rises as people
go on vacation. This, and high unemployment in the world's top
energy consumer, has raised concerns about the demand outlook.
                                
 U.S. crude oil stockpiles likely fell for the first time in
three weeks last week due to lower imports as refineries took
precautionary measures taken ahead of stormy weather, a
preliminary Reuters poll ahead of weekly inventory reports
showed on Tuesday. [ID:nN07121631]
                                
 Crude oil inventories are expected to have fallen by
600,000 barrels. The poll also showed forecasts for a 700,000
barrel increase in distillates, which include heating oil and
diesel fuel, and a 900,000 barrel decline in gasoline supplies.
                                
 The industry report from the American Petroleum Institute
will be released at 4:30 p.m. EDT (2030 GMT) Wednesday.
                                
 The U.S. Energy Information Administration's inventory data
will follow at 11 a.m. EDT on Thursday.
  (With additional reporting by Dmitry Zhdannikov and Alex
Lawler in London, Alejandro Barbajosa in Singapore; Editing by
David Gregorio)