OIL prices slipped below $80 a barrel yesterday as the U.S. dollar strengthened, making commodities like crude more expensive for international investors.

By early afternoon in Europe, benchmark crude for December delivery was down 56 cents to $79.84 a barrel in electronic trading on the New York Mercantile Exchange. The contract added 80 cents to settle at $80.40 on Wednesday.

Crude has traded near $80 a barrel for the last few weeks as investors watch a volatile dollar and mixed signs on the strength of the U.S. economy. Oil has jumped from $32 in December as traders have used crude and other commodities like gold, which are priced in dollars, as a hedge against a weakening dollar and inflation.

The euro slipped to $1.4847 yesterday in European trading from $1.4872 the previous day.

U.S. crude inventories unexpectedly fell last week, a sign demand could be improving. The Energy Information Administration said Wednesday that crude stocks fell four million barrels while analysts had expected a rise of 1.3 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

"Very slowly, the imbalances in the U.S. oil market have been sorting themselves out," Barclays Capital said in a report. "A key part of that adjustment has been the winnowing away of the overhang of inventories."

Barclays expects oil prices to average $76 a barrel in the fourth quarter and $85 next year.

Others remained skeptical about the bullishness of the inventory data.

JBC Energy in Vienna said the fall in crude stocks could be attributed to lower imports and refinery utilisation, while demand for products like heating oil and diesel remained weak.

"U.S. demand for petroleum product has been very stable for the last five month and while stability is better than continued erosion it is not yet showing any sign of rebound," said Olivier Jakob of Petromatrix in Switzerland.

In other Nymex trading, heating oil fell 1.51 cents to $2.0751 a gallon. Gasoline for December delivery dropped 1.49 cents to $1.9978 a gallon. Natural gas for December delivery lost 0.9 cent to $4.716 per 1,000 cubic feet.

In London, Brent crude for December delivery fell 59 cents to $78.30 on the ICE Futures exchange.