Oil prices rose more than $1 to above $71 per barrel on Tuesday, helped by a fall in the U.S. dollar after a report Gulf Arab states were in talks to replace the greenback with a basket of currencies in oil trading.
The report was swiftly denied by senior officials from leading oil producers Saudi Arabia, Russia, Kuwait and the United Arab Emirates.
Stronger stock markets, spurred by expectations of a faster-than-expected recovery in the U.S. economy, also bolstered oil prices.
U.S. crude for November rose $1.22 to a high of $71.63 per barrel before slipping back to around $71.41 by 1125 GMT, after gaining 46 cents to settle at $70.41 on Monday.
London Brent crude oil futures also rose sharply and were up 96 cents at $69.00 by 1125 GMT (7:25 a.m. EDT).
I think the dollar weakness is the main reason pushing oil prices higher today, but I can't imagine this story will support for very long or in the coming days, said Carsten Fritsch, oil analyst at Commerzbank.
The dollar fell on Tuesday after Britain's Independent newspaper reported Arab states were in talks to end the use of the dollar for oil trading.
Quoting unnamed sources, including Gulf Arab and Chinese banking sources, it said Gulf Arab states were in secret talks with Russia, China, Japan and France to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf.
But Saudi Arabia's central bank chief said the report was absolutely incorrect, while Algeria's finance minister said there was no need for a new currency in oil trade.
Analysts said ending the use of the dollar to settle oil trades between countries would be fairly easy, but replacing the currency in which oil is priced would require a massive effort.
These ideas have been talked about before but have never yet come to anything, said David Wech, analyst at JBC Energy in Vienna. This may have speculative impact in the short-term perhaps, but this is about a very long-term project.
Dealers said oil prices appeared to be in a trading range of $65 to $75 a barrel with little sign of a break out.
Weak demand data is stopping prices rallying and maybe fund support is stopping it sinking, said Christopher Bellew, oil broker at Bache Commodities in London.
Brokers MF Global said in a note the macroeconomic environment was weak enough to limit excessive rallies in a number of commodity complexes, including crude.
It will be all the more difficult for prices to push higher on geopolitical headlines, and so the rallies we likely will see, will be technical in nature, with questionable staying power, MF Global said.
U.S. crude and product inventories likely rose last week, according to a preliminary Reuters poll of analysts.
The American Petroleum Institute will release its inventory report on Tuesday at 2030 GMT (4:30 p.m. EDT), while the U.S. Energy Information Administration (EIA) will publish its supply data on Wednesday.
(Additional reporting by Fayen Wong in Perth and Joe Brock in London; editing by Keiron Henderson)