Oil prices fell for the third day in a row, retreating further from 18-month highs, as bloated inventories stoked concerns about weak demand and technical signals sparked a selloff.

The downturn erased early gains fueled by economic optimism and a weaker dollar.

The stark effects of weak fundamentals in the US, the world's largest oil consumer -- where crude inventories have risen for the past 10 weeks -- overrode guidance from financial markets, analysts said.

"Fundamentals are forcing crude to disconnect from financials," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

Front-month US crude fell 47 cents to settle at $84.92 a barrel, posting a tiny 5-cent gain on the week and finishing higher for the second straight week.

In London, ICE Brent crude closed up 2 cents at $84.83 a barrel, after two days of losses. For the week, Brent gained 82 cents and advanced for the second consecutive week.

The dollar turned weaker against the euro while Wall Street rose, both on hopes that aid could finally be cobbled together for beleaguered Greece.

The euro rose against the dollar as deputy finance ministers and central bankers in the euro zone decided that any emergency loans to Greece would be made on terms almost identical to standard International Monetary Fund bailouts, if Athens needed them.

That eased earlier worries as Fitch Ratings cut Greece's credit ratings by two notches and signaled further downgrades are possible, citing intensifying fiscal challenges in the debt-ridden country.

Usually, a dip in the dollar makes commodities more attractive to investors seeking less risky assets.

Early in the week, oil prices broke above the $65 to $85 range, where they have traded since August, to touch an 18-month high of $87.09 on Tuesday.

But government data on Wednesday put the breaks on the six-day rally as US crude inventories reached their highest level in almost 10 months, an indication supply is still outpacing demand.

"The past week's rally moved to a point where it's gotten ahead of itself," said Tom Pawlicki, an analyst at MF Global Research in Chicago.

Other analysts attributed Friday's drop to a technical reversal.

"The drop is being mostly fueled by technical selling after a top at around $87. We are currently likely to come back to the recent range between $80 and $83," said Eugen Weinberg, head of Commodities Research at Commerzbank in Frankfurt.

Looking ahead, traders were expected to keep a close eye on the yuan-dollar relationship. China, the world's second-largest oil consumer, has pegged the yuan near 6.83 per dollar since mid-2008 to help its exporters weather the global crisis.

But this has drawn increasing complaints from Washington that the yuan is seriously undervalued, handing Chinese firms an unfair trading advantage and effectively exporting unemployment.

Some think a revaluation would boost China's oil demand in the short term as it will make dollar-denominated crude cheaper for Chinese buyers.

Meanwhile, forecasters from RBS Sempra, a commodities joint venture, projected warmer-than-normal temperatures this summer in the US and as many as 14 named storms in the coming Atlantic hurricane season.

If so, the higher readings and active storm season could drive up energy prices, analysts said. – Reuters