Oil dipped below $79 a barrel on Thursday as an expected hike in U.S. crude stocks and a rise in the dollar from 15-month lows outweighed an IEA report that said global oil demand will return to growth this quarter.
Delayed weekly inventories data out of the world's largest fuel consumer the United States are set to show a 700,000 barrel rise in crude stocks, a Reuters survey showed.
This will follow a bigger-than-expected increase of 1.2 million barrels from the American Petroleum Institute.
A drop in U.S. jobless claims helped boost the dollar up from 15-month lows and this weighed on oil prices later.
U.S. crude futures fell 81 cents to $78.47 a barrel by 1158 GMT, after falling more than $1 to a daily low of $78.22.
Brent crude futures fell 65 cents to $77.30 a barrel.
The price dip came despite a report from the International Energy Agency (IEA) showing that global oil demand will grow in the fourth quarter for the first time in over a year.
Its forecast for 2010 demand at 86.2 million barrels per day is more bullish than two preceding surveys this week from OPEC and U.S. government agency the Energy Information Administration.
But analysts said that traders have already factored in the more positive demand picture and that this expectation helped crude rally above $80 a barrel in recent weeks.
Most market participants have already played the game based on a pretty strong demand recovery and it's not that surprising, said Andy Sommer, senior oil analyst with EGL Group.
He added that even in an environment of more robust fuel demand, it will still take a long time to clear swollen stocks of oil and oil products stored at land and on floating vessels.
The overall inventories picture is still bearish, he said.
The IEA estimated that the volumes of oil products, mainly heating oil, in floating storage was over 80 million barrels.
Analysts said that the dollar, still near 15-month lows against a basket of currencies, was likely to curb oil losses going forward.
Oil and the dollar tend to be inversely correlated because a weak dollar makes the commodity relatively cheap for non-dollar buyers.
Expectations that U.S. interest rates will remain near zero for the foreseeable future has increased the appeal of higher-yielding assets such as oil and gold.
Gold prices hit record highs above $1,120 an ounce on Thursday.
(Additional reporting by Felicia Loo in Singapore; Editing by William Hardy