Oil retreats below $80 on supply caution

The dollar hit a 14-month low against a basket of currencies on Tuesday. A weak dollar makes dollar-denominated commodities such as oil cheaper for holders of other currencies.

U.S. crude for November delivery touched $80.05 a barrel in Asian trade, its highest since October 14 last year, but then retreated to $79.35 barrel by 6.10 a.m. EDT, down 26 cents.

London Brent crude fell 20 cents to $77.57 a barrel.

Oil prices have surged by nearly $10 since the start of October, fueled by optimism about the strength of the corporate earnings season as a sign of economic recovery and renewed oil demand growth.

We see little support for the rally, which is now eight days old, and think that at some point OPEC spare capacity of about 6 million barrels and massive on and offshore stocks will trigger a correction phase, said JCB Energy analyst David Wech in a research note.

OPEC Secretary-General Abdullah al-Badri said on Tuesday that oil prices at $80 a barrel were a bit high, but they had helped the group revive major upstream investment projects to create a larger supply cushion.

There was not any strong fundamental factor for the move from $75 to $80. Now the market is looking for a fundamental story and OPEC is starting to make some noise, said analyst Olivier Jakob of Petromatrix.

U.S. stocks data from the American Petroleum Institute due later on Tuesday could accelerate the losses if crude inventories rise, analysts said.

A preliminary Reuters poll of analysts forecast the data will show a 2 million barrel build in crude stocks last week.

U.S. distillate stocks which include heating oil are near 26-year highs and are expected to be ample even if forecasts for below-normal temperatures materialize in the United States this winter.

Analysts said that if prices once again surpass $80 a barrel the rally could gather fresh momentum because of a high density of call options -- a contract that gives traders the option of buying crude at a set price -- at around this level.

Above $80 a barrel it's a question of options. There are layers of calls at this level, said Jakob.