Oil was steady on Monday after earlier touching a two-month high near $82 on expectations that the slow pace of the US economic recovery will prompt a monetary boost that would spur energy consumption.

November US crude fell 1 cents $81.57 a barrel at 0423 GMT, after touching $81.87 earlier, the highest price since August 6. ICE Brent was unchanged at $83.75.

US manufacturing growth slowed last month and inflation remained subdued in August, leaving the door open for the Federal Reserve to launch a fresh round of monetary policy easing.

How fast that happens will depend on economic indicators to be released before the Fed's next policy meeting on November 2-3. Markets await durable goods orders for August on Monday and monthly non-farm payrolls on Friday.

"For the oil markets, putting a floor under inflation expectations and easing concerns about deflation is important and constructive-to-bullish for prices," said Mike Wittner, Societe Generale's head of oil market research.

Attention "will be intensely focused on next Friday's US labor report, and the price reaction could be volatile."

The dollar hit a six-month low versus the euro and global stocks edged higher on Friday after Federal Reserve officials said more must be done to lift the slow-growing US economy.

Oil becomes relatively cheaper for buyers outside the US when the the greenback weakens. But a stronger dollar against a basket of currencies, up 0.15 per cent on Monday, capped oil's gains.

Asian stocks shot to a two-year high on Monday, helped by emerging market funds.

US economic data on Friday showed both consumer and construction spending rose more than expected in August, but investment in private projects fell to its lowest level in more than 12 years.

Tightening markets

The Houston Ship Channel, the main waterway through which crude flows into the Texas refining hub, may be closed for three days after a barge struck a highline electrical tower on Sunday, downing a power line stretching across the waterway to the busiest US petrochemical port, the US Coast Guard said.

The premium of US heating oil over gasoline reached its widest level since January 2009 on Friday, supported by rising demand, large exports of distillate fuels and the approach of the Northern Hemisphere winter.

"The recent strength in the gasoil anb heating oil cracks has been due to a variety of reasons that have tightened up prompt availabilities of physical gasoil," Wittner said.

"As a result, for the time being, this key part of the barrel is providing some fundamental leadership to the oil complex."

The International Energy Agency said on Friday it anticipated upward pressure on oil prices in the second half of 2011 due to a projected decline in oil stocks.

Investors are also betting on tighter market conditions in the shorter term, reflecting greater interest for commodities as prices climb.

Money managers raised net long crude oil positions to more than 107,000 on the New York Mercantile Exchange in the week through Sept. 28 from less than 97,000 a week earlier, the US Commodity Futures Trading Commission said on Friday. And open interest on call options to buy US crude for November 2010 at $85 a barrel jumped to almost 12,500 lots from less than 7,200.    

In other news, the United States and Britain warned their citizens on Sunday of an increased risk of terrorist attacks in Europe, with Washington saying al Qaeda might target transport infrastructure.

Western intelligence sources said militants in hide-outs in northwest Pakistan had been plotting coordinated attacks on European cities, the plans apparently surviving setbacks from a September surge in drone strikes and an arrest. – Reuters