Oil rose above $74 (U.S.) a barrel on Wednesday after the U.S. Energy Information Administration raised its forecast for crude demand and prices this year, a sign it expected an economic recovery to gain steam.
Oil reversed earlier losses after the U.S. dollar pared gains against other currencies and equities pared losses. A firming dollar can make oil, priced in dollars, less attractive to investors.
U.S. crude for March delivery settled 77 cents a barrel higher at $74.52 a barrel, capping a three-day rise in which oil has gained 4.7 per cent. Prices had fallen earlier in the day, dipping as low as $72.60 a barrel. ICE Brent crude futures settled up 41 cents to $72.56 a barrel.
The EIA on Wednesday forecast world oil demand to rise 1.2 million barrels per day in 2010 from a year earlier, raising its forecast by 120,000 barrels a day from a previous one. The agency also forecast that oil prices would average $81 a barrel in the second half of the year, up 9 per cent from current levels.
"A recovering economy and tighter supplies should help oil prices, even though we haven't seen inventories coming off yet," said Gene McGillian of Tradition Energy in Stamford, Connecticut. "After a sell-off last week, oil prices are now holding."
The EIA's demand forecast went counter to one earlier Wednesday from the Organization of the Petroleum Exporting Countries, which cut its 2010 demand estimate citing the slow pace of world economic recovery.
The dollar pared some gains against the euro after reports suggested a European rescue plan for debt-laden Greece may be in the works.
A bailout of Greece could alleviate jitters about the fiscal health of European economies, boosting demand for riskier assets like oil, analysts said.
"News that major European economies have resolved to help Greece and possibly other peripheral economies within the euro zone is bullish for risk assets," said Brad Samples, an analyst at Summit Energy in Louisville, Kentucky.
Oil prices came under pressure earlier Wednesday after the American Petroleum Institute industry group on Tuesday reported a large increase in U.S. crude inventories last week.
Crude stocks in the United States, the world's largest oil consumer, increased by 7.2 million barrels to 337.6 million barrels in the week to Feb. 5, API said.
The increase in crude inventories exceeded analysts' expectations for a 1.5 million barrel rise. Official stocks data from the U.S. Energy Information Administration (EIA), usually released Wednesday, have been delayed to Friday as U.S. government offices were closed due to a snow storm.
In other Nymex trading in March contracts, heating oil rose 0.96 cents to settle at $1.9469 a gallon, and natural gas was up 0.2 cent, settling at $5.292 per 1,000 cubic feet. Gasoline closed flat at $1.929 a gallon.
With files from The Associated Press