Oil falls towards $77 on mixed U.S. economy

U.S. industrial production rose faster than forecast in May, while housing starts fell more than expected. And the nation's demand for distillate fuel including heating oil and diesel jumped over the past four weeks, while crude inventories posted a surprise increase last week.

Renewed concerns about Spain's credit and banking system toppled the euro from a two-week high against the dollar on Wednesday. The greenback extended gains on Thursday, up about 0.3 percent against a basket of currencies. .DXY

European Union leaders hope to agree on ways to strengthen budget discipline and economic policy coordination on Thursday to show financial markets they can manage the euro zone debt crisis.

U.S. crude for July fell 65 cents to $77.02 a barrel at 0702 GMT, having touched $78.13 on Wednesday, the highest intraday price since May 10. ICE Brent for August slid 28 cents to $77.86.

The poorer than expected housing data and the unexpected gains in crude inventories are weighing on prices, said Serene Lim, a Singapore-based oil analyst at ANZ.

Investors will be quite jittery about the euro, and the strength of the dollar will cap gains in oil, Lim said.

A stronger dollar makes imports more expensive for holders of other currencies.

Prices also fell after Norwegian offshore oil workers landed a wage deal with energy companies on Thursday, averting a strike that had threatened production in three oil and gas fields in the North Sea.

Oil has recovered by about 19 percent from this year's low below $65 on May 20. Some analysts say the rebound responds to a clearer perception that the effect of Europe's debt crisis on energy demand will be limited.

The true likely importance of European debt concerns has perhaps now been better quantified, and the focus seems to have shifted to threats that might moderate growth in specific regions, rather than fears that the entire global economic recovery will be derailed, Barclays Capital said in a weekly report.

LOST QUARTER

With economic fears abounding, the second quarter has proved something of a lost quarter for oil prices, the bank said.

Overall oil product demand in the U.S. advanced by 1.9 percent in the past four weeks from a year earlier, the Energy Information Administration said in a weekly report on Wednesday.

Distillate use jumped almost 14 percent in the same period.

But the nation's crude stockpiles rose unexpectedly last week by 1.7 million barrels on the back of higher imports and lower refinery utilization, the EIA said.

Crude oil stocks at the Cushing, Oklahoma pricing point for U.S. crude futures rose by 200,000 barrels to 37.6 million barrels, EIA said.

The persistence of abundant supplies at the hub is depressing the price of front-month West Texas Intermediate crude relative to European benchmark Brent, which was trading about 85 cents higher on Thursday, compared with less than a 50-cent premium for Wednesday's settlement.

(Editing by Michael Urquhart)