UPDATE 1-Oil holds firm at $88, focus on eurozone concerns

Thu Dec 16, 2010 10:18am GMT

* Spain debt worries, fears of eurozone contagion weigh

* U.S. data shows higher industrial output, low inflation

* Huge fall in U.S. crude oil inventories, biggest in 8 yrs

* Coming up: U.S. jobless claims and housing data; 1330 GMT

(Recasts, previous PERTH, updates prices)

By Una Galani

LONDON, Dec 16 (Reuters) - Oil fell to around $88 a barrel on Thursday as a slew of positive economic data from the U.S. was tempered by mounting concerns over the debt-crisis in the eurozone.

Investors traded cautiously a day after Spain was warned by Moody's that it faced a downgrade to its credit rating and as European leaders were due to begin a two-day meeting in Brussels to try and agree the next steps in tackling the crisis. [ID: nLDE6BE29I]

"Any positive data that comes out of the U.S. is sidetracked by negative data coming out of the Euro zone," said David Taylor, an analyst at CMC Markets in Sydney.

Ratings agency Moody's said it did not expect Madrid would have to follow Greece and Ireland and accept a bailout from the European Union bailout, but said that it was a scenario that could not be ruled out.[ID:nL3E6NF0D8]

U.S. crude for January CLc1 fell 44 cents to $88.18 a barrel by 0943 GMT. ICE Brent LCOc1, which expires on Thursday, dropped 30 cents to $91.90.

Oil prices rose almost $1 on Wednesday following an unexpectedly large drawdown in U.S. inventory stocks, the biggest in eight years, and data showing higher industrial output and low inflation in the world's largest oil consuming nation. [EIA/S]

"The net position is pretty much neutral at the moment, but it seems to be reasonably supported around the $88 per barrel mark," added Taylor.

The eurozone concerns also weighed on the dollar, which traded down 0.2 percent against a basket of currencies.

A weaker dollar can often strengthen dollar-denominated oil prices as it makes fuel cheaper to holders of other currencies.

Weakness in the greenback can also push investment out of foreign exchange markets and into commodities.

U.S. industrial output rebounded in November to post its biggest gain since July, another sign of a faster pace of recovery in the fourth quarter, Federal Reserve data showed. [ID:nN15122981]

Government data also showed that inflation was low, with consumer prices posting a mild gain. [ID:nN15122981]

(Additional reporting by Rebakah Kebede; editing by William Hardy)

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