Oil recovers to around $68, vulnerable to selloff

LONDON, Sep 6 (Reuters) Oil prices traded around a barrel on Wednesday, recovering from a three and a half month low struck the previous session and hovering above key support levels that, if broken, could trigger a deeper selloff.

U.S. light crude was trading five cents higher at .65 a barrel by 1455 GMT. It touched a low of .77 on Monday, the weakest level since May 22.

London Brent crude was 32 cents lower at .77.

The market was technically vulnerable following last week's break through the a barrel mark and analysts said a convincing breach of the next key levels could herald a deeper decline.

For U.S. crude, the 200-day moving average, considered a funds buy/sell trigger, was effective around .50.

''The market has been very technical. If we break these levels, there is room to go much further down,'' said Olivier Jakob of Petromatrix.

Prices have fallen by more than from a record of .65 hit on Aug. 8 when concerns of supply disruption ran high.

Since then, diplomatic efforts to try to resolve Iran's dispute with the West have eased worries of possible disruption of the OPEC producer's exports.

Iran failed to meet an Aug. 31 decline to halt uranium enrichment or face the threat of sanctions.

Analysts had feared Iran might halt oil exports in response to any sanctions, but traders view the fact diplomacy is still under way as an indication disruption is unlikely for now.

Anxiety hurricanes could shut in U.S. oil and gas infrastructure has also ebbed after a relatively gentle Atlantic season so far and as the end of the summer driving season has reduced demand for now.

The sixth tropical storm of the Atlantic hurricane season Florence formed in the distant Atlantic on Tuesday and could become a hurricane, U.S. forecasters said.

On its current track, it did not appear to pose any threat to oil and gas facilities.

SHIFT AWAY FROM GASOLINE The emphasis is switching away from gasoline to the need for winter heating oil.

Weekly U.S. data was expected to show a 1.2 million-barrel build in distillate stocks, including heating oil, last week, but a 400,000 barrel fall in gasoline inventories and a 1.4 million barrel decline in crude stockpiles, a Reuters poll found. [EIA/S] The U.S. government will release its data on Thursday, a day later than usual because of Monday's Labor Day holiday.

Data in Japan also showed unusually high inventory levels.

As refiners stocked up early in case of a repeat of last winter, the coldest in two decades, stockpiles were 21 percent higher than a year ago.

REUTERS PKS HT2033