* U.S. crude touches year-high $79.05, then eases
* Some analysts say 9 percent gains last week exaggerated
* Wall St earnings to test market's mettle
(Updates prices, adds comment)
By Chris Baldwin
LONDON, Oct 19 (Reuters) - Oil hit a year-high above $79 a
barrel on Monday, driven by bullish sentiment across financial
markets, but later slipped back as traders questioned whether
ample fuel supplies justified current price levels.
U.S. crude for November delivery touched a session high of
$79.05 in early trade, the strongest since October last year,
before paring gains to $78.30 by 1111 GMT, down 23 cents from
the previous close.
London Brent crude <LCOc1 dipped 28 cents to $76.71.
"The gains were overwhelmingly driven by financials and
market optimism rather than fundamentals," said analyst Richard
Gorry at JBC Energy in Vienna.
Crude prices have gained more than 10 percent in October,
spurred by a weak U.S. dollar and bullish sentiment across
financial markets, interpreted by some oil speculators as
outlying indicators for a potential return to demand growth.
"Oil market participants are betting that equity markets
only take a pause and that positive third-quarter results in the
U.S. corporate sector and better U.S. housing market data
continue to fuel economic optimism," said analyst Carsten
Fritsch at Commerzbank Commodity Research.
IN EXCESS
All financial markets were expected to keep seeking
direction from further company results this week.
The U.S. dollar is close to 14-month lows against the euro
and edged lower against a basket of currencies on Monday.
Commodities priced in dollars become cheaper to non-dollar
investors as the U.S. currency weakens, which has the effect of
driving up the nominal oil price as investors move in.
MSCI's benchmark all-country world stock index was up around
half a percent early on Monday, recovering after investors were
disappointed by General Electric and Bank of America on Friday.
Thomson Reuters Proprietary Research shows that with around
a quarter of companies in the U.S. S&P 500 <.SPX> index having
reported, 79 percent have beaten analysts expectations. In a
typical quarter the percentage is 61 percent. []
But the oil market is mindful fuel demand is only expected
to recover gradually, and that large volumes of oil, including
refined products, are now in excess following a contraction in
energy use triggered by the financial crisis.
"OPEC spare capacity has reached 6 million barrels per day,
refining margins are depressed, OECD demand remains lacklustre
and the world has yet to come to terms with the massive middle
distillate stock surplus. Oil looks a little overblown at $79,"
JBC's Gorry said.
Oil stocks equate to around 62 days of forward demand, a
number the Organization of the Petroleum Exporting Countries
previously would have said was around 10 more than it would
like.
EVEN FLOW
At least some of the oil market's gains have come from
speculative flows, with money managers hiking net long crude oil
positions on the New York Mercantile Exchange in the week to
Oct. 13, the Commodity Futures Trading Commission said in a
report on Friday.
"As long as liquidity is so ample, and interest rates are
low, a lot of investors in the market will be coming into the
market," said Fritsch at Commerzbank.
Other support came from signs of economic strength in China,
the world's second-biggest energy user after the United States.
A senior official from the National Development and Reform
Commission said Chinese gross domestic product grew more than 7
percent in the first nine months of 2009.
(Additional reporting by Fayen Wong in Perth; Editing by Sue
Thomas)
