Oil prices rallied above $71.50 a barrel on Wednesday, extending the previous session's dollar-driven 4.5 percent rally as investors waited for an OPEC meeting to conclude and fresh U.S. inventory data.

With OPEC widely expected to keep output targets unchanged, the focus remained on the dollar, which shed more than 1 percent on Tuesday to hit a one-year low of 77.05 against a basket of currencies.

This is very much in a dollar-driven, inflation-driven, hysteria-driven market, MF Global commodity and energy analyst Edward Meir said.

Oil looks terrible on the charts. OPEC will likely leave things unchanged and will end the meeting with exhortations to stick to quotas. There is potential weakness, yet we saw the biggest move in a month.

NYMEX crude for October delivery stood at $71.44 a barrel by 2:05 a.m. EDT, up 34 cents from Tuesday's settlement. London Brent crude rose 21 cents to $69.63 a barrel.

U.S. crude rallied 4.5 percent by Tuesday's settlement from the previous settle on Friday. With prices more-or-less flat and no settlement on Monday due to the Labor day holiday, the gains are the biggest since mid-August.

Crude prices, although up 50 percent so far this year, are still less than half their peak struck in July 2008, a level that OPEC kingpin Saudi Arabia said both producers and consumers are happy with.

The Organization of the Petroleum Exporting Countries (OPEC) is meeting in Vienna on Wednesday, and is likely to keep the official output target stable.

The Al-Hayat newspaper cited Saudi Oil Minister Ali al-Naimi as saying on Wednesday that OPEC will not change its oil supply policy when the group meets on Wednesday.

For graphics on OPEC compliance and output cuts, click:



Later on Wednesday, the market will get its first steer on U.S. crude stocks with numbers from the American Petroleum Institute due at 4:30 p.m. EDT, followed by the Energy Information Administration's on Thursday at 11 a.m. EDT. Both are delayed a day by the Labor Day holiday.

A Reuters preliminary analysts' poll calls for a 1.5 million barrel drawdown in crude stocks, a 700,000 barrel increase in distillate supplies and a 1.4 million barrel decline in gasoline inventories.

But with the driving season over and the heating season yet to begin, traders will be watching to see whether demand in the world's top energy user reflects hopes for economic recovery.

On the fundamental front, Valero, the biggest refiner in the U.S., has decided things are grim enough to sack hundreds of workers and idle several major processing units.

That looks pretty bearish but it's not a fundamentally driven market. It's about inflation, the dollar and macro numbers, a trader in Singapore.

Technically oil, which traded between $70.89 and $71.56 in Asia, faces resistance delineated by a series of abortive break-out attempts since July at around $72.50. The downside barrier at just above $67 was formed by a triple-bottom last week.

Traders will keep half an eye on Tropical Storm Fred as it grows toward hurricane force in the eastern Atlantic, but its path should keep it clear of land for the next several days and it should skip U.S. Gulf oil and gas installations entirely.

(Editing by Michael Urquhart)