Oil dips towards USD 78 per barrel

US crude for February delivery fell 28 cents to 78.49 a barrel by 0332 GMT in thin pre-holiday trade.

It settled up 72 cents on Monday,after touching 79.12,the highest since Nov. 23. Heating oil futures led gains in the oil complex as forecasters called for colder weather in the United States,the world8217;s largest energy consumer.

London Brent crude for February shed 22 cents to 77.10.

8220;People are expecting a drop in the US inventory that has sustained oil prices at the moment and liquidity is quite low,8221; said Serene Lim,Energy and Commodity Strategist at ANZ Bank.

US crude inventories fell last week as refiners drew down inventories for year-end tax issues and imports declined,a preliminary Reuters poll of analysts showed.

Ahead of weekly inventory data from industry group American Petroleum Institute and the US government Energy Information Administration EIA,seven analysts forecast crude inventories fell an average of 1.5 million barrels in the week to Dec. 25.

If the prediction holds,it will be the fourth-straight week of declines. Last week,EIA data showed crude stocks fell a hefty 4.9 million barrels.

SEVERE WINTER BITES

Distillate stocks,which include heating oil and diesel,were expected to drop 1.9 million barrels as colder temperatures swept the nation.

US natural gas futures ended with strong gains on Monday,after rallying late to a near one-year high due to the harsh US winter this week that should boost heating demand despite typically slow industrial and commercial loads during a holiday-shortened week.

Temperatures in the US Northeast 8212; the world8217;s largest heating oil market 8212; were expected to average above normal on Monday before dipping to below normal through Friday,private forecaster DTN Meteorlogix said.

Oil8217;s rally of more than 12 per cent over two weeks were limited on Tuesday by the dollar,which has risen broadly in recent weeks on optimism the US economy may be on track for improved growth in 2010.

The dollar index versus a currency basket hovered under this week8217;s three-month high,as trading activity wound down before Christmas. Gold also rose while Asian stocks rallied.

Oil has often eased this year when the dollar firms,making crude more costly for holders of other currencies.

A week after the latest OPEC meeting,the United Arab Emirates,among the most compliant to OPEC quota limits,said it will supply less of its three main lighter crude grades to Asia for February,but will ship more of the heavy Upper Zakum grade.

Traders expected the political upheavel in Iran to have little impact on oil prices,after at least 10 leading opposition figures were arrested on Monday,a day after eight people were killed in anti-government protests.