Oil fell on Tuesday but held above $68 a barrel as investors took profit from a jump of more than 3 percent a day earlier, spurred by hopes of economic recovery on the back of improving factory activity.
Crude prices hit a near seven-month high and Wall Street soared on Monday after data showed U.S. manufacturing contracted at a slower-than-expected pace in May, industry activity expanded in China and surveys showed Europe's situation was also easing.
The dollar, which hit its lowest this year a day ago and made oil more attractive to investors, steadied on Tuesday.
U.S. crude fell 43 cents to $68.15 a barrel by 0158 GMT after hitting its highest settlement since November 4 on Monday. London Brent crude dipped 40 cents to $67.57.
Prices are a little inflated based on inventories in the United States and in terms of real demand, but if you have to pick a direction for oil, it has to be up, based on the favorable indicators, said Ben Westmore, a commodities analyst at National Australia Bank.
Oil prices gained 30 percent in May amid a broad-based commodities rally on signs of a turnaround, as they continued to pull away from the lows below $33 a barrel touched in December, pushing OPEC to maintain output targets when it met in Vienna last week.
The Reuters-Jefferies CRB index <.CRB>, which tracks 19 mostly U.S.-traded commodity markets, jumped 3 percent on Monday in its biggest one-day increase in two months, and staged its best monthly gains in 35 years in May.
There are real signs that physical demand is returning... We are generally seeing more consistency in the impact of measures (to rein in the economic crisis), he said.
Traders will shift their focus to U.S. oil inventory data for indications on fundamentals in the world's top consumer, with the American Petroleum Institute's report due later on Tuesday and the more authoritative U.S. Energy Information Administration's data expected on Wednesday.
A Reuters survey of analysts forecast weekly U.S. inventory data would show a 1.5-million-barrel decline in crude stocks for the week to May 29, while gasoline and distillate inventories were seen rising.
The 2009 Atlantic hurricane season officially started on Monday and would run through November 30, but analysts said the potential supply impact for this year would likely be softer because U.S. stockpiles were brimming.
U.S. Energy Secretary Steven Chu said in an interview at the Reuters Global Energy Summit in Washington that while the jump in oil prices reflects an improving economy, additional price hikes could slow the economic recovery.
But the head of the International Energy Agency (IEA) said global oil demand may not have bottomed out yet, although it could still recover by the end of 2009 if the economy gets back on track.
(Reporting by Chua Baizhen; Editing by Clarence Fernandez)