Oil fell by $1 toward $68 a barrel on Monday as a stronger dollar prompted a retreat from a seven-month high above $70 hit last week.

The dollar extended gains against a basket of currencies after posting its largest one-day rise in more than five months on Friday as stronger U.S. macro-economic data encouraged expectations of a rise in interest rates.

A firmer dollar makes commodities such as oil, denominated in the currency, more expensive to holders of other currencies.

U.S. light crude for July delivery was down 40 cents per barrel at $68.04 by 1348 GMT (9:48 a.m. EDT). The contract rose to a high of $70.32 a barrel on Friday, a seven-month high for the front-month contract, before closing at $68.44, down 37 cents.

London Brent was down 34 cents at $68.00 a barrel.

U.S. crude and Brent both looked to be settling into a range between $65 and $70 per barrel, traders said, supported by cuts in output by oil producers but undermined by relatively low demand for oil in the industrialised countries due to recession.

Output cuts by OPEC have helped stabilize prices in the last few weeks but they are not enough to get the market up toward the $75-$80-per-barrel level, said Christopher Bellew, oil broker at Bache Commodities in London.

I think we might be looking at $65-$70 per barrel as a trading range for a while, he added.


Several members of the Organization of the Petroleum Exporting Countries, most notably its most influential member, Saudi Arabia, have said they see around $75-$80 as a fair level for oil prices and one that would encourage future investment in the oil and gas industry.

OPEC members have promised to cut 4.2 million barrels a day of oil from their production levels in September and so far analysts say they have met 75-80 percent of that pledge.

Venezuelan Oil Minister Rafael Ramirez said on Sunday OPEC members were complying with 86 percent of promised cuts. A Reuters survey published last Wednesday said compliance had slipped to 75 percent from 81 percent in March and April.

JP Morgan has raised its forecast for fourth-quarter 2009 U.S. oil prices, this time to $65 a barrel, versus above $55 in their latest monthly energy report in May, on expectations of economic recovery and seasonal factors.

If economic forecasts are right, and we are coming out of the recession, the path for oil is going to be somewhat higher, said Lawrence Eagles, Global Head of Commodities for JP Morgan Chase at the Asian Oil and Gas Conference.

European shares were lower at midday on Monday, led down by commodity shares and banks.

(Editing by James Jukwey)