Oil slips below $79 amid European debt fears

Oil prices slipped below $79 a barrel Friday as optimism about fresh signs of economic growth was clouded by concerns that stress tests on European banks could reignite the continent's debt crisis.

By early afternoon in Europe, benchmark crude for September delivery was down 35 cents to $78.95 a barrel in electronic trading on the New York Mercantile Exchange.

The contract surged $2.74 on Thursday to settle at $79.30, an 11-week high, as stock markets jumped on better-than-expected second quarter corporate earnings. The Dow Jones industrial average rose 2 percent Thursday, and European and Asian stock markets gained Friday.

Crude had wavered in the mid-$70s this month before Thursday's breakout, suggesting investors have renewed confidence the global economic recovery is on track.

Britain statistics agency said Friday the country's economy grew by 1.1 percent in the second quarter, and Germany's business confidence in July recorded the biggest increase since the country's reunification in 1990.

"For now, investors believe the global market place will make it out of the funk we are currently in and the markets will trade higher," Sander Capital said in a report. "The world is still going to grow and consumption of raw materials is still going to take place."

However, traders waited to assess the results of stress tests on European banks later Friday which could herald further economic woes and dent demand.

Commerzbank said in a note to investors that it expected prices to keep their momentum but added that "the decisive impetus for a rise above $80 is lacking at the moment."

JBC Energy said in a report that uncertainty about the pace of recovery would still weigh on crude prices.

"We believe that we are close to the next downward cycle, with or without having reached the $80 threshold. On the economic side there are too many weak spots and few signs for hope," JBC said. "Fundamentally, physical crude and product markets continue to struggle with oversupplies amid limited activity."

In other Nymex trading, heating oil fell 0.80 cent to $2.0554 a gallon, gasoline dropped 1.36 cents to $2.1330 a gallon and natural gas was down 0.2 cent to $4.641 per 1,000 cubic feet.

Brent crude was down 35 cents to $77.47 a barrel on the ICE futures exchange.