Oil edged lower toward $77 a barrel on Friday, extending a 2 percent drop in the previous session and pressured by a stronger U.S. dollar.

As the dollar rises it makes commodities like oil priced in the greenback more expensive for those holding alternative currencies. U.S. crude for December delivery fell 39 cents to $77.07 a barrel by 1000 GMT. London Brent crude slipped 27 cents to $77.37.

Oil prices are consolidating after strong gains early this week and fall yesterday. The dollar, risk appetite and equity movements are the main drivers for oil at the moment, said Carsten Fritsch, oil analyst at Commerzbank in Frankfurt.

For the last month oil prices have traded mainly between $75 and $80 a barrel as mixed signals over economic recovery failed to give a clear picture of the outlook for energy demand.

I think we need to see a sustained shift in market sentiment, not just one day to the next, then we could go below $75 and weak fundamentals will be of more importance, Fritsch added.

A lack of demand for oil products has led to very high inventory levels being stored at sea as well as on land. Volumes in floating storage are estimated to be around 90 million barrels, more than total global daily oil consumption.

Analysts say products being bought for floating storage, often a financial strategy where the buyer is able to sell the products on for a profit at a later date, has created the illusion of improved demand.

By the end of the winter there is likely to be as much distillates afloat as in the total U.S. at the end of winter 2007 and we expect that it will be more and more difficult for some of the Wall Street commodity banks to avoid mentioning the subject and to continue to hide the floating storage fill-up as 'demand from emerging economies', said Olivier Jakob, oil analyst at Petromatrix in a research note on Friday.


Asian stock markets slipped on Friday, following a drop on Wall Street, but European shares have started the day strongly, limiting oil's losses.

Crude prices have swung with the dollar this week, jumping over $3 on Monday and then shedding over $2 on Thursday as the U.S. currency firmed against a basket of currencies.

The dollar has been shifting in response to changing perceptions of the U.S. economy.

The latest data came from the Conference Board's index of U.S. leading economic indicators -- a gauge of the U.S. economy's prospects -- rose to its highest since September 2007, but fell short of Wall Street's expectations.

Fresh data showing a record one in seven U.S. mortgages were in foreclosure or at least one payment was past due in the third quarter also added to investors' worry that the housing market's recovery will be tepid at best.

Asia is leading the global economy out of the deepest downturn in decades but the recovery will be marred by high unemployment and huge government debt across the industrialized countries, the OECD said on Thursday.

Many analysts have cautioned that the high jobless rate in the United States and Europe will keep global petroleum demand at anemic levels for some time to come.

While the past few months have seen a gradual turnaround in global oil demand data and oil demand expectations, there are still significant areas of weakness and dislocations, Barclays Capital said in a report.

(Editing by James Jukwey)