Oil fell below $68 a barrel on Tuesday as prices slipped from a sharp rally to a seven-month high in the previous day.

U.S. crude fell 88 cents to $67.70 a barrel by 5:30 a.m. EDT. On Monday, it closed at $68.58 after hitting $68.68, the highest settlement and intraday prices, respectively, since early November last year on back of Wall Street rallies.

London Brent crude dipped 71 cents to $67.26.

Analysts said investors were selling off contracts to lock in profits from Monday's price jump.

There was a huge jump in prices in the past couple of days so we are seeing profit-taking now. There are some technical indices showing the market has been overbought, Andy Sommer, an oil analyst with EGL AG in Switzerland, said.

Sommer said technical analyses indicated the fall in prices would be short-lived and that there was potential for an uptrend for the mid and long-term.

Oil has moved up steeply from lows below $33 in December. Prices rose 30 percent in May in a broad-based rally in equities and commodities markets on expectations the worst might be over for the global economy.

WEAK FUNDAMENTALS

Fundamentals, however, remained weak, Sommer said.

The current fundamentals are a long way from strong. We see strong demand coming back in China but the rest of the world is still weak, he said.

Some statistics have shown China's imports of commodities have been rising over several months, while oil demand in other key markets, including the United States, has remained much below year earlier levels.

The U.S. and China are the world's top and number two oil consumers.

Traders will shift their focus to weekly U.S. oil data for the latest indications on fundamentals, with figures from the American Petroleum Institute due later on Tuesday and the U.S. government on Wednesday.

A Reuters survey of analysts forecast weekly U.S. inventory data would show a 1.5 million-barrel decline in crude stocks for the week to May 29, while gasoline and distillate inventories were seen rising.

The 2009 Atlantic hurricane season officially started on Monday and would run through November 30. Analysts said the potential supply impact for this year would likely be softer because U.S. stockpiles were brimming.

(Additional reporting by Chua Baizhen in Singapore; editing by James Jukwey)

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