Oil prices fell toward $61 a barrel on Monday, shedding some of the previous session's gains, on risk aversion after North Korea said it had conducted an underground nuclear test.

Still, prices hovered around a six-month high, as a weak U.S. dollar and expectations the Organization of the Petroleum Exporting Countries (OPEC) would keep its official production targets unchanged during its meeting on Thursday limited oil's losses.

U.S. crude futures for July delivery fell 29 cents to $61.38 a barrel by 0729 GMT (3:29 a.m. EDT). The contract settled up 62 cents at $61.67 a barrel on Friday, boosted by data showing a big increase in Chinese demand, along with a weak dollar.

London Brent crude fell 38 cents to $60.40.

U.S. markets are closed on Monday for the Memorial Day holiday. NYMEX floor trading resumes on Tuesday.

There is a short-term knee-jerk negative impact on oil prices but the impact will be quite limited since the two Koreas are not suppliers of oil, so there won't be any disruptions to supply, said Victor Shum, an analyst at Purvin & Getz in Singapore.

North Korea's latest provocation, coming after what it called a peaceful satellite launch that sent a rocket over Japan earlier in the year, caused an initial tumble in South Korean shares and a pull-back in higher-yielding currencies.

But this proved short-lived as market players believed North Korea's action was another political gambit aimed at securing concessions from major global powers.

Analysts said a weak dollar, now languishing near its lowest level this year, would continue to offer support to oil.

Oil prices rallied around 9.5 percent last week, boosted by a spate of U.S. refinery problems and unrest in major oil exporter Nigeria, and are nearly double their lows hit in December on hopes the economic recession is easing.

Nigeria's main militant group said on Monday it had attacked major oil pipelines in the Niger Delta to prevent five flow stations feeding a facility operated by U.S. Chevron from operating, but there was no independent confirmation.

Saudi Arabian Oil Minister Ali al-Naimi said OPEC would probably stay the course when it meets this week as he forecast a pick-up in demand and prices eventually rising toward $75 a barrel.

Algeria's oil minister said OPEC was unlikely to cut output at its meeting next week amid a weak global economy, warning compliance with previous supply cuts had slipped in April and needed to be tightened first.

China wants to set up a 3 million tonnes reserve of oil products this year, which is practically impossible, a researcher at a think-tank run by the country's top oil refiner Sinopec Group, was quoted as saying on Sunday.

Crude oil speculators on the New York Mercantile Exchange steeply increased net long positions in the week to May 19, according to data from the U.S. Commodity Futures Trading Commission released on Friday.

(Editing by Ben Tan)

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