Oil prices jumped more than 2 percent to top $71 a barrel on Tuesday as the U.S. dollar fell to a one-year low against the euro and top exporter Saudi Arabia said the economy was rebounding.
Traders sold off the greenback on views that the U.S. Federal Reserve will signal plans to maintain loose monetary policy well into 2010. The weaker dollar makes commodities cheaper for buyers holding other currencies.
The Fed started a two-day meeting, and a decision on interest rates was expected on Wednesday.
U.S. crude rose $1.84 to settle at $71.55 a barrel, after falling $2.33 on Monday. London Brent crude traded up $1.84 to settle at $70.53 a barrel.
The only thing that's holding the crude oil futures market up is the lower dollar, said Mark Waggoner, president of Excel Futures in Huntington Beach, California.
Further support came as Saudi Arabian Oil Minister Ali al-Naimi said demand for the kingdom's oil was increasing and that there were signs of economic growth.
The world economy seems to be recovering. I hope it will recover fast and therefore it will impact demand, he told Reuters in an interview, adding he did not expect OPEC to cut output next year.
Oil markets this year have found support from signs of a recovery in the wider economy that would bolster flagging fuel demand.
Crude dropped from record highs near $150 a barrel in July last year to below $33 a barrel as the recession battered oil consumption, prompting the Organization of the Petroleum Exporting Countries to agree to a series of output cuts to support prices.
Further signs of strength came after data showed apparent oil demand from No. 2 oil consumer China rose 2.9 percent in August from a year earlier, the fifth consecutive rise.
Still, Chinese domestic oil product demand has not kept up with the refinery operation rates, prompting oil companies to export fuels in large volumes.
Traders were also awaiting U.S. oil inventory data from the American Petroleum Institute, which will be released later on Tuesday and the U.S. Energy Information Administration on Wednesday.
Analysts in a Reuters poll forecast the data would show increases in U.S. domestic oil product inventories, including gasoline, diesel and heating oil, and a drop in crude stockpiles.
(Reporting by Matthew Robinson, Robert Gibbons, and Gene Ramos in New York, Ikuko Kurahone in London; Fayen Wong in Perth; Editing by David Gregorio)