Oil prices dipped below $71 a barrel on Monday, losing momentum after last week's rally as traders focused on swollen inventories and prospects for a stronger dollar.

U.S. crude fell 34 cents to $70.59 a barrel by 6:02 a.m. EDT. London Brent crude fell 18 cents to $73.41.

U.S. prices gained a modest 2 percent over the course of last week but closed lower on the day on Friday, following U.S. data that showed the first drop in unemployment in 15 months.

That was regarded as raising the chances of higher interest rates before the year-end and gave a surprise boost to the U.S. dollar, although it weakened early on Monday against a basket of currencies. <.DXY>

The U.S. payrolls data would have been supportive for crude, but investors are now focusing on the strength in the U.S. dollar, said David Moore, a commodities analyst at the Commonwealth Bank of Australia.

For much of this year, oil prices have risen in line with gains on equities and have been negatively correlated to the dollar. A stronger dollar can be bearish for dollar-denominated commodities, which effectively become more expensive to non-dollar buyers.

Analysts have said those relationships, which were only ever provisional, could have begun to shift as the market returns its focus to fundamentals of supply and demand.

Tokyo shares hit a 10-month closing high on Monday, but European shares faltered after Friday's broad-based rally. <.EU>

The MSCI world equity index edged up 0.1 percent after hitting its highest since October on Friday.

INVENTORIES STILL SWOLLEN

Demand for fuel should recover, if the economic recovery suggested by this year's stock market rally so far is to be believed, but in the immediate term inventories are still brimming.

Although last week was overall positive for the oil price, the more striking movement was the rise in long positions, regarded as a bet on future price strength, reported by the U.S. regulator the Commodity Futures Trading Commission.

In a report released on Friday, the CFTC said crude oil speculators on the New York Mercantile Exchange had increased their net long positions sharply in the week to August 4.

The price did not move a lot, but the week was very positive on the investment side, said Olivier Jakob of Petromatrix. The weekly additions to the long futures positions were at the highest level of the year.

That should underpin the oil price, which at above $70 is not bad from the standpoint of the Organization of the Petroleum Exporting Countries, the group's president said over the weekend.

The group next meets to consider output policy on September 9 in Vienna.

It has agreed to curb output by 4.2 million barrels per day from production levels last September and is delivering 71 percent of that pledge, a Reuters survey found.

Leading exporter Saudi Arabia was expected to provide broadly steady supplies in September compared with August to European and Asian refiners, industry sources said on Monday.

(Additional reporting by Fayen Wong, Jonathan Leff and Osamu Tsukimori, editing by Anthony Barker)