Oil holds modest gains as rally fizzles

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NEW YORK (CNNMoney.com) -- Oil prices settled slightly higher Thursday, giving back strong gains from earlier in the session, after a big selloff on Wall Street overshadowed optimism about the economic outlook and future energy demand.

Light, sweet crude for June delivery rose 37 cents to settle at $56.71 a barrel after climbing to a session high of $58.40 a barrel.

Oil had rallied for most of the session as investors focused on better-than-expected reading on the job market and signs that the U.S. banking sector may be in better shape than previously thought.

But the upbeat tone gave way to ongoing concerns about the economy and the poor fundamental backdrop for the oil market.

The retreat came as losses in the stock market accelerated. The price of oil has tended to rise and fall with the major indexes as traders view stocks as a barometer of future energy demand.

Stocks slumped as investors braced for the official results of the government's bank stress tests. The tests were conducted on 19 of the nation's largest financial institutions and are intended to determine which banks will need to raise capital to withstand more economic pain.

While early reports suggest many of the banks in question are healthier than expected, the market was primed for a selloff after a big run-up in March.

Oil has traded in a range near $50 a barrel in recent sessions, down more than $100 from last summer's all-time high, as concerns about anemic energy demand and historically high inventory levels have weighed on prices.

The government reported Wednesday that the nation's stockpiles of crude rose by 600,000 barrels last week. That was much smaller than the 2.2 million barrel gain analysts had expected but still left inventory levels at their highest since 1990.

Separately, the American Automobile Association said retail gas prices rose overnight for the ninth consecutive day.

The national average price for a gallon of regular unleaded gasoline increased more than 3 cents to $2.141, from the previous day's price of $2.110.