Oil eased below $73 a barrel on Friday, reversing an earlier surge to a seven-week high, as optimism over the pace of demand recovery in top energy consumer, the United States, faded on the back of mixed economic data.
Industry data on Wednesday showing a surprise 8.4 million barrel plunge in weekly U.S. crude stocks -- against analysts' forecasts for a 1.3 million barrel build -- had buoyed sentiment.
But oil's surge proved short-lived as consensus grew on Thursday that this was due to a fall in imports rather than signs of a genuine rebound in U.S. fuel demand. Upbeat leading economic indicators in July and weak labor market figures last week further muddied the outlook.
The market will scour Federal Reserve Chairman Ben Bernanke's speech before the Federal Reserve Bank of Kansas City Economic Symposium later in the day for more clues on the health of the world's largest economy.
By 0525 GMT, the new front month contract for October delivery was down 56 cents at $72.35 a barrel, off a seven-week high of $73.24 earlier. It had settled 92 cents lower at $72.91 the previous day. London Brent crude for October was down 44 cents at $72.89.
Oil is on track for a 7.3 percent gain this week.
Wednesday's inventory report was definitely positive for the market, but the data is volatile, and you need to see a trend forming, rather than a one-off decline, before it gets fully priced into the market, said Ben Westmore, commodities analyst with the National Australia Bank.
Although sentiment is positive, it's very shaky, as fundamentals are still weak. You will see more volatility until the fundamentals correct, he said, adding that crude was likely to trade in a range of $70-$75 next week.
So far, U.S. economic signals have been mixed. The index of leading economic indicators rose for a fourth month in July, suggesting the recession was abating, but data showing the number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week, highlighting the fragile state of the recovery.
As yet, there are few signs of recovering U.S. fuel demand. Freight traffic across North America fell 17.9 percent in the week ended August 15 from the same 2008 week, a trade group said on Thursday in a weekly report.
Key policymakers are gathering in Jackson Hole, Wyoming, this week to mull how to prevent the crisis from recurring. Bernanke's speech at 1400 GMT could shed more light on the U.S. economy's rebound from its worst recession in 70 years.
The National Association of Realtors will release existing home sales for July at 1400 GMT. Economists forecast a total of 5.00 million annualized units versus 4.89 million in June.
Apart from economic data, traders will also take cues from the direction of currency and equity markets.
U.S. stocks rose for a third straight session on Thursday with financial shares leading gains after U.S. manufacturing data and a rebound in Chinese stocks reassured investors.
China equities, viewed by investors as a weathervane of risk sentiment, were flat to higher on Friday, after surging 4.5 percent on Thursday on technical buying, following the index's 20 percent fall in the two weeks to Wednesday's close.
The yen jumped to a one-month high against the dollar, as traders fretted that Chinese shares could take a hit following a report on Chinese measures to tighten banks' capital rules.
On the supply front, increased oil output to a year-high from OPEC president Angola, flouting agreed limits, has stacked the odds against any change when the producer group meets next month.
Without a sharp slide in crude prices, OPEC is likely to leave its output targets unchanged when it meets on September 9, most OPEC delegates and analysts said.