Oil fell toward $71 a barrel on Friday, trimming a 3 percent gain in the previous session, as a bounce in the dollar outweighed a more positive demand outlook from the International Energy Agency.

U.S. crude for November delivery fell 51 cents to $71.18 a barrel by 1300 GMT (9 a.m. EDT), after closing more than $2 higher on Thursday.

London Brent crude fell 39 cents to $69.38 a barrel.

In comments that supported the dollar, U.S. Federal Reserve Chairman Ben Bernanke indicated monetary policy might have to be tightened as an economic recovery takes hold, adding the Fed could remove its easy money policies even while its balance sheet remained bloated.

Overnight the dollar index received some support from Bernanke's comment...On flat price directional trading, it is very difficult to defend the idea that we will trade anything but the dollar/equity correlation, said oil analyst Olivier Jakob of Petromatrix in a research note.

The dollar sank to a 14-month low against a basket of currencies earlier this week.

A weaker greenback tends to support oil because dollar-priced commodities become cheaper for buyers using other currencies.

Adding credence to the dollar, Kuwait's finance minister said on Thursday oil trading would remain in U.S. dollars, the latest denial of a report this week about a move to replace the world's reserve unit with a basket of currencies.

DEMAND FORECASTS

On the demand side, the IEA, adviser to 28 industrialized countries on energy policy, revised its global oil demand growth estimate for 2010 but analysts said this expectation was already priced into the market.

It also raised its oil demand forecast for the remainder of the year.

The IEA report did not have a significant impact as it's in line with the broad consensus for this year's outlook, said oil analyst at JBC Energy David Wech.

Earlier this week, the U.S. government Energy Information Administration (EIA) raised its oil demand forecast amid signs the economic climate is improving.

Analysts said that high oil product stocks in the world's top energy user would cap price gains going forward.

The EIA on Wednesday reported gasoline stocks leapt 2.9 million barrels last week, nearly three times the build analysts had expected. Distillate stocks, including diesel and heating oil -- rose by 700,000 barrels to fresh 26-year highs.

Higher OPEC seaborne oil exports, excluding Angola and Ecuador, also weighed on the market. Such exports will rise 160,000 barrels per day (bpd) in the four weeks to October 24, to 22.65 million bpd, according to Roy Mason, an analyst at British consultancy Oil Movement. [ID:nWLA5234] (Additional reporting by Felicia Loo; editing by James Jukwey)

Ben Bernanke