Oil falls on weak U.S. factory data, firm dollar

Oil fell on Monday, reversing gains as weak U.S. manufacturing data and a firming dollar hit crude prices that were buoyed earlier by a deal to raise the U.S. debt ceiling.

U.S. crude futures for September delivery dropped $1.03 to $94.67 a barrel by 1:56 p.m. (1756 GMT), falling faster than Europe's Brent, which lost 35 cents to $116.39, down from a six-week high above $120 a barrel earlier.

Brent's fall was less pronounced in part due to pipeline and platform maintenance in the North Sea oil patch that could affect supply this week.

Oil had been up sharply until a report showed the Institute for Supply Management (ISM) U.S. manufacturing index fell to its lowest since July, 2009. The global manufacturing sector also expanded at the slowest rate in two years last month, several surveys from around the world showed on Monday.

The U.S. dollar firmed 0.7 percent against a basket of foreign currencies, pushing up the cost of crude priced in dollars for most foreign currency holders. .DXY

Oil prices had risen earlier along with equities markets after U.S. government leaders reached a deal to avoid default and raise the debt ceiling. Congress still must vote to approve the deal.

"The oil market is really flailing around this morning and the initial euphoria of the debt deal seems to be waning," said Gene McGillian of Tradition Energy in Connecticut.

"There's still plenty of uncertainty surrounding the debt deal ahead of congressional votes, and a disappointing ISM number has now taken some of the bidding out of the market."

200-DAY MOVING AVERAGE

U.S. crude broke below its 200-day moving average price of $94.94, a move that can sometimes precede heavier levels of technical selling. (Graphic: link.reuters.com/jub92s )

Oil futures erased gains along with stock markets, with U.S. stocks down more than 1 percent after rising early. .N

Consumption data from European industrial juggernaut Germany showed that primary German energy use fell by 3.2 percent in the first half of 2011 versus the same period of 2010, in part due to high oil prices.

Cyprus may soon have to seek an international debt bailout, becoming the latest European economy to request a rescue if it fails to repair its finances, the island's largest commercial bank warned on Monday.

Fitch warned it could further cut Cyprus' sovereign rating, in part due to Cypriot bank exposure to Greek debt.

SUPPLY FACTORS

BP (BP.L) said the North Sea Forties Pipeline System will be closed for five days this week to allow workers to remove an unexploded mine from World War II that was discovered submerged in water near the pipeline.

France's Total (TOTF.PA) shut its North Sea Elgin platform, which pumps 104,000 barrels per day of condensate, for summer maintenance, the company said without disclosing the duration of the maintenance.

"The continued problems in the North Sea, Forties in particular, are supporting Brent and helping boost its premium to the U.S. counterpart," said Tom Bentz, director at BNP Paribas Commodities Futures Inc in New York.

Several U.S. oil and gas producers were ramping up oil output in the Gulf of Mexico following the dissipation of Tropical Storm Don, which had forced several oil platforms to shut down since late last week.

But meteorologists were still watching a tropical wave in the eastern Atlantic that could become Tropical Storm Emily, potentially moving through the Gulf of Mexico oil region as it approaches the southern U.S. coastline by the end of the week.

US government figures showed that only around 2.3 percent of US Gulf of Mexico oil production remained shut mid-Monday due to Don, down from as much as 6 percent on Sunday.