Oil hit a year-high above $79 a barrel today, driven by bullish sentiment across financial markets, but later slipped back as traders questioned whether ample fuel supplies justified current price levels.

U.S. crude for November delivery touched a session high of $79.05 in early trade, the strongest since October last year, before paring gains to $78.33, down 20 cents from the previous close.

Oil market participants said they remained mindful that fuel demand is only expected to recover gradually, and that large volumes of oil, to include refined products, are now in excess following a contraction in energy use triggered by the financial crisis.

"OPEC spare capacity has reached 6 million barrels per day, refining margins are depressed, OECD demand remains lacklustre and the world has yet to come to terms with the massive middle distillate stock surplus. Oil looks a little overblown at $79," JBC's Gorry said.

Oil stocks equate to around 62 days of forward demand, a number the Organization of the Petroleum Exporting Countries previously would have said was around 10 more than it would like.

EVEN FLOW

At least some of the oil market's gains have come from speculative flows, with money managers hiking net long crude oil positions on the New York Mercantile Exchange in the week to Oct. 13, the Commodity Futures Trading Commission said in a report on Friday.

"As long as liquidity is so ample and interest rates are low, a lot of investors will be coming into the market," said Fritsch at Commerzbank.

Other support came from signs of economic strength in China, the world's second-biggest energy user after the United States.

A senior official from the National Development and Reform Commission said Chinese gross domestic product grew more than 7 percent in the first nine months of 2009.