Oil creeping back toward $80

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NEW YORK (Reuters) -- Oil prices rose Monday as strong manufacturing data from the United States and China stoked optimism for a turnaround in the economy and in fuel demand.

U.S. crude rose $1.13 to settle at $78.13 a barrel, after dropping $2.87 Friday.

The U.S. manufacturing sector grew in October for the third consecutive month and at a faster rate than was expected, according to an industry report released Monday.

Further support came from data showing pending sales of previously owned U.S. homes unexpectedly rose in September to their highest level in nearly three years ahead of the expiration of a popular tax credit for first-time buyers.

"A string of economic data led by higher U.S. manufacturing numbers gave the oil markets a shot in the arm," said Phil Flynn, analyst, PFGBest Research, Chicago.

"Oil futures are still trading in the recent range here but the market is sensing that if manufacturing continues to be strong, that will translate into higher demand for oil."

Oil got an early bump after data showed HSBC's China Purchasing Managers' Index (PMI) had risen in October for the seventh straight month, to an 18-month high of 55.4, pointing to sustained strength in the giant oil consuming nation's manufacturing sector.

Energy traders have closely watched macro economic data and equities markets this year for signs of a turnaround in the economic crisis that could bolster flagging oil demand.

Oil prices also drew some support from a Reuters survey showing OPEC output had declined slightly, although supplies from giant non-OPEC producer Russia reached a new post-Soviet record.

Producer group OPEC agreed to a series of output cuts last year to help support oil prices, which dropped from a record near $150 a barrel in July 2008 to below $33 a barrel in December due to weak demand.

A Reuters poll of analysts forecast weekly U.S. inventory data for the week to Oct. 30 would show a 1.5-million-barrel build in crude stockpiles, a 500,000-barrel draw in distillates and a 300,000-barrel rise in gasoline inventories.

The American Petroleum Institute releases its weekly report Tuesday, while the U.S. Energy Information Administration releases its data Wednesday.