Oil fell on Tuesday, resuming last week's trend and erasing part of the previous session's gain of 1.6 per cent, on lingering worries about the US economy ahead of a Federal Reserve meeting later in the day.

US crude for October fell disproportionately to contracts further out, ahead of its expiry later on Tuesday. It lost 53 cents to $74.33 a barrel by 0408 GMT, while the November contract shed 16 cents to $76.03.

Oil on Monday tracked a global rally in equities, but gains came in thin trade ahead of the Fed meeting, with total contracts changing hands on the New York Mercantile Exchange (NYMEX) about 25 per cent below the average volume over the last 30 days, according to Reuters data.

"The front month is heading to expiration date today, so liquidation is pressuring the market," said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.

"The overall market is not very bad, reflected by the second-month contract. Equity markets are coming back and the sentiment of investors is getting better than before, heading into the FOMC meeting today."

The US Federal Reserve is expected to tread water at a policy-setting meeting on Tuesday with a renewed promise to keep its portfolio from shrinking but no new steps to ease monetary policy.

"Risk appetite is reappearing. I think the Fed's statement will not be that negative," Emori said.

Japan's Nikkei average rose 0.6 per cent on Tuesday, hitting a seven-week intraday high, with resource-related shares such as Mitsubishi Corp rising after oil, gold and other commodities rose the previous day. The S&P 500 hit a four-month high on Monday as Wall Street sought to extend a three-week rally.

ICE Brent for November dipped just 5 cents to $79.27, trading more than $3 higher than the equivalent contract for US crude. That premium had shrunk to less than $2 last week on expectations Midwest markets would tighten after a leak forced Enbrigde to shut the biggest Canada-US crude pipeline for more than a week.

"We would argue that Brent currently better reflects the situation in the global oil market, where consumption growth remains fairly robust," Credit Suisse analyst Stefan Graber, based in Singapore, said in a report.

Recovery doubts

Still, the US recovery is so soft that it risks creating a "frustrated generation" of young people unable to find work despite having heeded advice to stay in school, the secretary general of the Organization for Economic Cooperation and Development said on Monday.

And US home-builder sentiment remained stuck at a 1-½   year low in September, the latest suggestion the sector is in for a painful and prolonged climb back to health.

Industry group the American Petroleum Institute will publish US oil inventory data for the week to Sept. 17 on Tuesday at 2030 GMT, followed by government statistics from the US Energy Information Administration on Wednesday at 1430 GMT.

Crude inventories probably fell by 1.9 million barrels last week due to lower imports from Canada because of the Enbridge pipeline outage and as tankers navigated around stormy weather, a Reuters survey of analysts showed on Monday.

Distillate stocks, which include heating oil and diesel, were expected to have risen by about 300,000 barrels, after three weeks of drawdowns, the poll showed. Gasoline inventories were estimated to be little changed, off by only 100,000 barrels, according to the survey.

The US National Hurricane Center said there was a high or 90 per cent chance of a new tropical cyclone developing west of the Cape Verde Islands in the eastern Atlantic over the next 48 hours, as the 2010 Atlantic hurricane season continued at active pace. – Reuters