Oil hovers below $71 on economic recovery concerns

SINGAPORE — Oil prices hovered below $71 as investors mulled whether a three-month rally went too far, too fast amid high supplies and weak demand.

Benchmark crude for July delivery rose 24 cents to $70.86 a barrel by late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. On Monday, it fell $1.42 to settle at $70.62

Oil has doubled since March on expectations the worst of the global economic slowdown is over.

But bad economic news could puncture investor optimism. An index of New York manufacturing released the Federal Reserve Bank of New York on Monday indicated that demand weakened in June.

The Standard & Poor’s 500 index, which had risen 40 percent since March 9, dropped 2.4 percent Monday.

“I wouldn’t be surprised if oil goes back to the low $60″ level, said Clarence Chu, a trader at market maker Hudson Capital Energy in Singapore. “The rally hasn’t been driven by fundamentals, which are still pretty weak.”

Wednesday’s release of petroleum inventory data from the Energy Department’s Energy Information Administration could provide some insight about crude demand. Analysts expect a drawdown of 1.7 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos. Stocks have fallen for several weeks, but are still near 19-year highs.

Traders are also eyeing the U.S. dollar, as a weaker American currency would bolster prices since investors often look to commodities such as crude as a hedge against inflation.

The euro rose to $1.3869 on Tuesday from 1.3775 on Monday.

In other Nymex trading, gasoline for July delivery rose 0.83 cent to $2.06 a gallon and heating oil gained 0.96 cent to $1.83. Natural gas for July delivery was steady at $4.18 per 1,000 cubic feet.