UPDATE 7-Oil up but gains pared after Greece downgrade

                                
 * Moody's Greece downgrade pulls oil, euro, equities lower
                                
 * Euro zone industrial output April rise lifted oil early
                                
 * U.S. says storm could form in the Atlantic, supports oil
                                
 * Coming up: July Brent contract expiry on Tuesday
 (Recasts, updates prices, market activity)
                                
 By Robert Gibbons
                                
 NEW YORK, June 14 (Reuters) -  U.S. oil prices rose on Monday, but
pared gains after Greece's bonds were downgraded, cutting into optimism
about global economic recovery that had fueled the earlier rise.
                                
 "Crude failed near $76.00 and spent much of the morning trading
sideways. But it began to drift lower, accelerated by the Moody's downgrade
of Greece. All markets backed off earlier highs," said Tom Bentz, broker at
BNP Paribas Commodity Futures Inc in New York.
                                
 U.S. crude for July <CLc1> rose $1.34, or 1.82 percent, to settle at
$75.12 a barrel, having reached a $75.99 intraday high, which still left
prices well below a 19-month high above $87 in early May.
                                
 At 2:37 p.m. EDT (1837 GMT), London's ICE Brent <LCOc1> for July
delivery rose 76 cents to $75.11 a barrel. The Brent July contract expires
on Tuesday.
                                
 Moody's Investors Service on Monday downgraded Greece government bond
ratings into junk territory, citing the risks in the euro zone/IMF rescue
package for the debt-laden country. [ID:nN14207740]
                                
 Oil and equities were lifted earlier by data showing euro zone
industrial production in April surged year-on-year more than in any month
in almost two decades, giving investors renewed confidence that the global
economic recovery could be gathering pace. [ID:nLDE65D0YC]
                                
 The European Union's statistics office, Eurostat, said industrial
output in the 16 countries using the euro rose 0.8 percent month-on-month
for a 9.5 percent year-on-year gain.
                                
 After the Greece bond downgrade, the euro pared gains against the
dollar on rekindled fears about excessive debt levels in several euro zone
countries. [USD/] The dollar index <.DXY> remained weaker against a basket
of currencies.
                                
 A weaker U.S. dollar tends to boost the price of dollar-priced
commodities as it lowers the price to holders of other currencies and
reduces the value of the currency oil producers receive for their product.
                                
 U.S. stocks trimmed their gains after the news on the Greece downgrade.
[.N] Earlier, stocks had rallied around the world, fueled by the strong
European industrial data. [MKTS/GLOB]
                                
 European leaders will meet on Thursday to try to convince financial
markets that Europe's debt crisis can be contained through improved
economic policy coordination and budget discipline. [ID:nLDE65C0FB]
                                
 Though oil prices slipped on Friday, they managed to post a gain for
the week, with U.S. crude prices up more than 3 percent on lift from strong
Chinese export data and lower crude stockpiles [EIA/S] reported by the
government.
                                
 The U.S. National Hurricane Center said on Monday that a low-pressure
system in the central Atlantic Ocean had a 60 percent chance of developing
into a tropical cyclone over the next day or two, adding to support for
oil. [ID:nN14196622]
                                
 OPTIMISM ABOUT DEMAND
                                
 Oil traders and analysts have been eyeing signs U.S. demand is showing
better signs of recovery as the summer driving season heats up and
distillate use improves.
                                
 After reaching a 19-month high above $87 a barrel in early May, crude
futures fell below $65 a barrel later in the month as the European debt
crisis unfolded.
                                
 Money managers raised their net long positions for crude oil in the
week to June 8, the U.S. Commodity Futures Trading Commission said on
Friday, marking the first time the net long positions increased since the
start of the euro zone crisis. [ID:nN11606129]
                                
 (Graphic http://graphics.thomsonreuters.com/10/CFTC_Crude110610.gif)
                                
 For prices to extend their upward march, U.S. crude would have to
settle above $76, a level reached in intraday trade last week for the first
time in a month, according to Tony Nunan, a risk manager with Mitsubishi
Corp, based on technical chart analysis.
                                
 Oil analysts are also anticipating U.S. crude oil output will be
tightened from offshore drilling delays in reaction to BP's Gulf of Mexico
oil spill. [ID:nN13165272]
                                
 "With the U.S. drilling ban likely to hit supplies from the third
quarter onward and demand expected to rise seasonally between now and
August, we feel that seasonality and fundamentals are moving towards a
price rebound," J.P. Morgan analyst Lawrence Eagles said in a report.
 (Additional reporting by David Sheppard in London, Alejandro Barbajosa in
Singapore and Gene Ramos in New York; Editing by Sofina Mirza-Reid)