* Dollar drops to two-month low against euro
* European bank watching interest rates closely
* U.S. crude oil inventories higher
(Updates throughout, adds quote)
By Jessica Donati
LONDON, Jan 21 (Reuters) - U.S. crude oil prices stalled,
erasing early gains on Friday and widening the discount to
Brent, which rose after the dollar dropped to a two month low
against the euro on renewed confidence in European recovery.
The divergence between U.S. crude oil and Brent prices
widened as a surprise increase in U.S. inventories on Thursday
weighed on the U.S. market. []
"There is much more transparency on liquidity and
inventories and I think as a result that makes it a lot easier
to plot... U.S. crude is coming down on the back of inventory
data last night," said Michael Hewson, a market analyst at CMC
markets.
U.S. dollar weakness helped spur buying across a range of
commodities, with Brent <LCOc1> gaining 46 cents a barrel to
$97.04 per barrel by 1436 GMT. But U.S. crude futures <CLc1>
turned lower as the U.S. trading day began, trading 12 cents
lower at $89.51 per barrel, down from as high as $97.41 per
barrel earlier on Friday.
A weakened U.S. currency makes dollar-denominated
commodities cheaper for holders of other currencies. The dollar
index <.DXY>, which tracks the currency's performance against a
basket of major currencies, and is heavily weighted against the
euro, was down by around 0.5 percent.
"The oil market is looking back at what the dollar is doing
and the dollar is coming under further pressure, and it has
broken through significant support levels," said David Morrison,
a strategist at GFT.
U.S. crude remains nearly 2 percent lower on the week
however, while Brent futures, also around 1.5 percent lower,
have held at an unusual premium to U.S. crude. Brent's spread
against U.S. benchmark crude topped $7 a barrel on Friday, down
from last week's surge above $8, which was the widest since
February 2009.
"The spread is starting to get rather stretched and when it
does get rather stretched there is usually a sharp correction at
some point," Hewson added.
CONFIDENCE IMPROVING
Further U.S. dollar weakeness could continue to support oil
prices. Successful bond sales [] and improving
business morale [] have boosted the euro,
pressuring the European Central Bank (ECB) to step in to curb
inflation, which could weaken the U.S. dollar further.
"China is raising rates, Brazil is raising rates, you have
inflation pressures picking up in the euro zone, while there's
certainly no chance of interest rates going up any time soon in
the U.S.," added Morrison.
On Thursday, the European Central Bank (ECB) said it was
monitoring prices levels closely although its medium term
outlook was unchanged [].
"A combined move with the weaker dollar and improving
business confidence in Germany is supporting oil. On Thursday we
saw a very strong support point... We could see a test of the
upper level, which is $99.20 for Brent," said Thorbjorn Bak
Jensen," an analyst at A/S Global Risk Management Ltd.
Oil is nearly $50 below the record high of $147.27 hit in
July 2008, but a rally that set in late last year, taking oil
prices to nearly $100 a barrel has stoked concerns a fragile
economic recovery could unravel.
Ministers of the Organization of the Petroleum Exporting
Countries have said there is enough oil on the market and there
is no need to produce more, although some analysts do not rule
out an informal increase in output.
"There is a rising risk of coming into the office one Monday
morning to find OPEC has raised output dramatically," JP Morgan
analysts led by Lawrence Eagles said, adding, "we believe the
time has come for investors to pare risk and take some profits."
(Editing by Keiron Henderson)
