Oil fell toward $71 a barrel on Wednesday, pressured by doubts over U.S. demand as investors cautiously awaited government inventory data after an industry report showed a surprise build in crude oil stockpiles.
Oil's losses were limited by continued U.S. dollar weakness on Wednesday as some investors dumped the greenback for riskier assets.
A weaker dollar makes commodities cheaper for buyers holding other currencies.
U.S. crude for November delivery slipped 29 cents to $71.47 a barrel by 1220 GMT. The October contract, which expired on Tuesday, settled $1.84 up at $71.55 a barrel, supported by the falling dollar.
London Brent crude fell 31 cents to $70.22.
The weak dollar is the main reason oil prices are near or above $70 since fundamentals do not warrant such high prices, Carsten Fritsch, oil analyst at Commerzbank said.
The bearish API data is still weighing on prices. Inventories were higher than expected and market participants are repositioning themselves as they may expect data today to also show higher stocks.
The American Petroleum Institute's report, seen as a precursor to the more authoritative U.S. Energy Information Administration data due at 1430 GMT, showed crude stocks rose 276,000 barrels in the week to September 18, against a Reuters poll forecast for a drawdown of 1.5 million barrels.
The increase in crude inventories was driven by imports, which rose 219,000 barrels per day (bpd) as well as slower refinery runs, which dipped 92,000 bpd, the API said in its weekly report.
The U.S. dollar fell to a one-year low against a basket of currencies on Wednesday ahead of a Federal Reserve policy announcement later in the day.
While the Federal Reserve Bank is widely expected to hold interest rates steady, markets will be watching for comments later on Wednesday that indicate the Fed might wind back its super-accommodative policy stance in view of improving economic data, which would boost the dollar, analysts said.
Top oil exporter Saudi Arabia told Reuters in an interview on Tuesday demand for its crude was increasing, and that was reflective of the world's economy recovering from its worst recession since the Great Depression.
(Editing by James Jukwey and Toby Chopra)