Oil Settles Above $79 on Upbeat Economic Data

Oil rose nearly 2 percent Tuesday after data showed U.S. factory orders in September expanded at a quicker pace than expected, signaling potential for more fuel demand in the world's biggest energy consumer.

Factory orders expanded 0.9 percent in September, surpassing Wall Street analyst expectations, and factory inventories fell.

"Factory orders are a positive sign. This helps the broad sentiment that an economic recovery will eventually boost fuel demand and send prices higher," said Gene McGillian of Tradition Energy in Stamford, Connecticut.

The positive U.S. economic data helped reverse an earlier 2 percent price decline in oil prices Tuesday, when investors shunned riskier assets including oil. Crude prices had fallen as the U.S. dollar firmed to a one-month high against other currencies and equities fell after disappointing earnings from Swiss banking giant UBS.

U.S. light, sweet crude for December rose $1.47 to settle at $79.60.

London Brent crude also rose.

Traders were also awaiting weekly U.S. oil inventory data. Analysts expect the data to show crude inventories rose by 1.5 million barrels last week, although inventories of distillates like heating oil and diesel fuel were expected to fall, according to Reuters weekly poll of analysts.

EIA/S U.S. oil inventory data for the week to Oct. 30 is due from industry group American Petroleum Institute late Tuesday, followed by official data from the U.S. Department of Energy on Wednesday.

Analysts said a recovery in industrial activity may help justify higher oil prices. Adding to expectations that industrial demand may soon recover was news that U.S.investor Warren Buffett's Berkshire Hathaway has plans to buy railroad company Burlington Northern Santa Fe for $26 billion, in its largest-ever acquisition.

Energy traders have been looking to wider economic data and equities markets this year for signs of a turnaround in the economy that could raise oil demand.

OPEC member Venezuela, however, said Tuesday it saw no need for the producer group, which pumps a third of the world's oil, to raise crude output when its ministers meet in December.

Some OPEC members have signaled they may call for OPEC to produce more crude if global crude stocks fall and prices rise.

"We do not share the position of increasing output. We still notice a lot of instability in the oil market," Venezuelan Energy Minister Rafael Ramirez told reporters at a conference.

Oil and other commodities prices, such as gold, rose in spite of a firming dollar Tuesday. Crude has usually been pressured lower this year when the dollar rises, partly because it is priced internationally in dollars. The dollar's strength is also widely seen as a proxy for investors' appetite for risk, rising when investors seek safer assets.

U.S. crude futures rose to their highest level this year at $82 per barrel on Oct. 21, but have fallen back as investors question whether rising prices are justified amid a slow economic recovery.

The U.S. Federal Reserve starts its two-day meeting later on Tuesday and is expected to keep interest rates unchanged near historic lows. But the dollar strengthened partly on speculation that the Fed may signal it is not beholden to keep rates low for an "extended period."

Copyright 2009 Reuters. Click for restrictions.