| GEO Business|
| Oil hovers near $71 on Europe woes|
| Updated at: 0911 PST, Thursday, May 27, 2010|
SINGAPORE: Oil hovered near $71 a barrel on Thursday as concern about Europe's debt crisis and falling stock markets outweighed data showing U.S. demand is surging.
A Wednesday report signaling China may review its euro-zone debt holdings fed investor concerns that the European debt crisis could reverse the global economic recovery, sending the Nikkei to a fresh six-month low on Thursday.
"On the negative side, there was some report out of China about the percentage of assets that they would allocate to European bonds, a further sign of falling confidence in the euro area," said Ben Westmore, a commodities analyst at National Australia Bank.
"Oil will largely follow equity markets. They are probably the foremost gauge about where confidence is at the moment. If you see falls and increased risk aversion and a move to the dollar, it's going to have downward influence on oil as well."
U.S. crude for July fell 71 cents to $70.80 a barrel at 0206 GMT (10:06 a.m. EDT), while ICE Brent shed 61 cents to $71.13.
But U.S. crude prices on Wednesday posted their biggest gain in nearly eight months, adding 4 percent to a one-week high near $72, after the Energy Information Administration said U.S. oil-product supplies fell last week.
"We saw a very positive reaction in the markets in terms of the data flow," Westmore said.
"The distillate stocks, when you account for seasonality, are still very high -- we put them 30 percent above normal --, but a fall in gasoline and distillates is a good sign. We are at least moving in the right direction."
Oil demand in the U.S. climbed almost 7 percent over the past four weeks, a government report showed on Wednesday, led by a 16 percent jump in demand for distillates, a category that includes diesel and heating oil.
"U.S. oil demand is currently surging to a degree that has not been seen for many years," Barclays Capital analyst Paul Horsnell said in a weekly report.
"The demand surprise has been of a very significant scale, and the most important element of that has been the whiplash upwards in diesel demand."
Diesel consumption is an important gauge of economic activity because it is used for trucking and industry.
Investors were expected to look out for continued evidence of a rebound in U.S. economic activity after reports on Wednesday showed a surge in durable goods orders and new home sales for April.
U.S. preliminary first-quarter Gross Domestic Product figures will be published at 1230 GMT.
The data will show "whether the recovery is unfolding as expected," Westmore said.
Crude stockpiles at the Cushing, Oklahoma, pricing point fell from record levels last week, the EIA report showed. But the nation's total crude inventories gained a larger-than-anticipated 2.4 million barrels.
U.S. crude is still down almost 19 percent from an early-May 19-month high above $87.