Brent crude rebounded towards $126 on Tuesday as investors awaited comments from the U.S. central bank after the outlook improved for the world's largest economy amid simmering tension between the West and Iran that could threaten oil supply.
The Federal Reserve could later on Tuesday reinforce a view prompted by recent data that the U.S. economy is recovering, buoying the demand outlook for the world's largest oil consumer, but it is unlikely to kick off further quantitative easing.
Brent crude rebounded 43 cents to $125.77 by 0812 GMT, after settling down on Monday for the first time in four sessions. The April Brent contract expires on Thursday. U.S. April crude was up 56 cents at $106.90.
The FOMC could recognise that the economy has improved and this will have a positive impact on the market, said Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments.
Oil prices were also supported as the demand outlook improved with euro zone finance ministers giving their final approval to a second bailout for Greece -- the source of the currency bloc's debt crisis.
The euro bounced from a one-month low, while the dollar hovered below a seven-week high against a basket of currencies <.DXY>, bolstered by expectations that a string of encouraging economic news should persuade the U.S. central bank not to apply fresh stimulus, at least for now.
A weaker greenback makes dollar-denominated oil more attractive for holders of other currencies.
The market appears to be lowering its expectations of a further round of quantitative easing given the generally positive tone of recent US data, Natalie Robertson, an ANZ analyst, said in a note.
This could generate some volatility in commodities, and potential downside risks.
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Euro zone crisis in graphics http://r.reuters.com/hyb65p
TOUGH MESSAGE TO IRAN
Escalating tensions between the West and Iran over Tehran's nuclear programme and supply disruption from Syria, South Sudan and Yemen have underpinned oil prices.
The West is expected to reinforce its tough stance against Iran's nuclear programme this week when United States President Barack Obama and British Prime Minister David Cameron meet.
The top officials are expected to send a strong message to Iran to meet its international obligations or face the consequences.
Prices remain supported by the uncertainty as negotiations continue, Astmax's Emori said.
The conflict in Syria appeared to inch closer to civil war even as the West clashed with Russia at the United Nations Security Council over the country, with activists and the Damascus government trading blame for a massacre of civilians in the city of Homs.
In the United States, the American Petroleum Institute will release weekly stockpile data later in the day. U.S. crude oil inventories are expected to have increased 2.2 million barrels last week, a preliminary Reuters survey of analysts showed.
(Editing by Clarence Fernandez and Himani Sarkar)