Oil hovers above $66 as 3-month rally cools off

SINGAPORE " Oil prices hovered above $66 a barrel Thursday in Asia after a jump in U.S. crude inventories triggered a sharp pullback from a three-month rally.

Benchmark crude for July delivery was down 3 cents at $66.09 a barrel midday in Singapore in electronic trading on the New York Mercantile Exchange. On Wednesday, the contract tumbled $2.43 to settle at $66.12.

Oil soared to seven-month highs earlier this week " double the price in March " on investor expectations that a dismal U.S. economy could be stabilizing.

But the Energy Department's Energy Information Administration said Wednesday that crude in storage unexpectedly rose by nearly 3 million barrels to about 20 percent above year-ago levels, suggesting demand remains sluggish.

"It was a timely reminder that the U.S. economy is still very weak," said David Moore, commodity strategist with Commonwealth Bank of Australia in Sydney. "The market had started to price in a V-shaped recovery in the world, and it's likely to be more gradual."

Other signs Wednesday also suggested investor optimism may have outrun economic reality.

A Commerce Department report showed a smaller-than-expected rise in factory orders. And the Institute for Supply Management, a trade group of purchasing executives, said the services sector shrank in May below economists' estimates at the slowest pace since October.

Traders will be eyeing key U.S. economic data the next couple days, including Thursday's May retail sales report and Friday's jobs data.

Rising optimism of an improving economy may set investors up for disappointment if the recovery is uneven, Moore said.

"We're moving from a situation were 'less bad' data fueled the market's anticipation of recovery to one where markets are coming to expect it, so data becomes 'less good,"' Moore said.

In other Nymex trading, gasoline for July delivery was steady at $1.90 a gallon and heating oil was steady at $1.74 a gallon. Natural gas for July delivery was steady at $3.78 per 1,000 cubic feet.

In London, Brent prices rose 3 cents to $65.91 a barrel on the ICE Futures exchange.