Oil extends recovery, trades above $126

Singapore, July 25:: Oil rose above $126 a barrel on Friday, extending a rebound a day earlier that helped stem a nearly two-week dive as buyers crept back into the market before the weekend, superceding lingering demand worries.

Concerns that high prices and a weaker US economy will undermine demand have driven oil down more than $20 from a record peak above $147 a barrel set earlier this month, but technical trading and a short-covering bounce helped buoy prices on Thursday.

US light crude for September delivery rose 66 cents to $126.15 a barrel by 0526 GMT after gaining $1.05 a barrel a day ago, recovering from a seven-week low.

London Brent crude rose 52 cents to $126.96 a barrel.

"We're definitely going to see some short-covering today after falling 15 per cent in just over a week and as we approach the weekend," said Jonathan Kornafel, director, Asia, Hudson Capital Energy.

"Having said that, we can still head lower after some of the panic buying ahead of the weekend," he added.

US stock markets fell by 2 per cent or more a day ago after news of another drop in US home sales, adding to the gloom surrounding the outlook for the world's top oil user.

"Since the source of much of the selling of the past 1-½ weeks has been the heightened attention to demand deterioration, we look for this market to place greater emphasis on sharp stock market sell-offs than curency movements going forward," said Jim Ritterbusch, president of Ritterbusch & Associates.

He added he expected crude could drop as low as $117 within about a week.

Some analysts say the price drop in oil and other commodity markets since mid-July has been driven by some traders unwinding short-dollar/long-oil positions, which has also helped lift the US currency to a one-month high against the yen.

Bearish stock data on Thursday coupled with mild weather forecasts drove natural gas prices down 5 per cent, in turn weighing on oil, traders said.

Tropical Storm Dolly, which was the Atlantic season's second hurricane, was scratched off the market's focus as it moved moved inland across South Texas, having barely put a dent in crude oil, natural gas and fuel output.

Even after the recent price fall, oil is up almost 30 per cent in 2008 and is up six-fold from 2002 due to demand from growing economies such as China.

The US Senate will vote on Friday on a Democratic bill that seeks to curb excessive...