Oil prices slipped back from an 11-week high above $79 on Friday, falling on uncertainty over European bank stress test results even as companies began shutting in Gulf of Mexico production ahead of a tropical storm.
The dollar's strength against the euro and a basket of currencies .DXY also added pressure.
U.S. crude oil for September delivery fell 50 cents to $78.80 a barrel by 11:37 a.m. EDT, trading from $78.40 to $79.60, the highest front-month crude price since prices reached $80.39 on May 6.
London ICE Brent futures fell 54 cents to $77.28.
Crude oil prices have climbed about 3 percent this week partly because of support from the formation of Tropical Storm Bonnie, which moved toward south Florida on Friday on a track that was expected to take it over the site of BP Plc's (BP.L) (BP.N) massive oil spill in the Gulf of Mexico by Saturday afternoon, the U.S. National Hurricane Center said.
Bonnie was expected to make landfall over Florida, cut across the peninsula and move into the Gulf Friday evening before hitting the Lousiana-Mississippi coasts on Sunday. It was not predicted to reach hurricane strength.
It's early but traders seem to be saying that maybe we overplayed the storm and it's not going to be that bad. If the dollar keeps strengthening it will put more pressure on commodities, said Phil Flynn, analyst at PFGBest Research in Chicago.
Several oil companies began shutting in oil and natural gas production ahead of the storm on Friday.
Analysts said prices could stay in a relatively narrow range until results of regulators' tests on how 91 banks across Europe would cope with another economic downturn arrive.
Investors have been waiting anxiously for these results to judge the strength of the European banking system and its resiliency against further escalations of the sovereign debt crisis, Thorbjorn Bak Jensen, oil market analyst with Global Risk Management in Denmark, said in a daily note.
Positive stress test results, thus further dollar weakness and increased risk appetite, can cause another test of $80-a-barrel resistance. Failure will bring us down back to the strong support at $75 a barrel.
The S&P 500 and Dow Industrials edged higher as another round of solid corporate earnings offset uncertainty ahead of the stress test results, expected to be published at 1600 GMT on Friday. .N
The American Petroleum Institute on Friday provided another assessment of U.S. oil demand, two days after the government's weekly report showed crude stocks dropping for a fourth straight week, while stocks of refined products rose .
Demand for crude oil and petroleum products climbed 1.7 percent in June from a year ago, on rising use of distillate and jet fuels, though gasoline demand fell, the API said in its monthly supply report.
(Additional reporting by Gene Ramos in New York, Ikuko Kurahone in London and Alejandro Barbajosa in Singapore; editing by Alden Bentley)