(Reuters) - Oil prices climbed towards $106 on Thursday, supported by a weaker dollar and renewed buying interest after the steepest plunge in nearly three months wiped four percent off crude markets in the previous session.
Rekindled fears about Europe's debt crisis helped trigger a downturn across asset classes on Wednesday, while oil market losses were compounded by the lack of agreement by the Organization of Petroleum Exporting Countries (OPEC) on individual output allocations limiting oil supply.
The OPEC outcome will have little influence on policy and net supply but sentiment-wise contributed to the combination of events that led to weakness yesterday, said Gareth Lewis-Davies, a senior energy strategist at BNP Paribas.
This morning, oil is moving in response to a reversal in investor risk appetite in line with a move in currencies, he continued.
The dollar index .DXY slipped 0.15 percent early on Thursday, erasing some of Wednesday's gains, when investors piled into the currency widely considered a safe-haven, helping to send the dollar to an 11 month-high against the troubled euro.
Brent crude was up 31 cents at $105.33 by 0948 GMT, after settling $4.48 a barrel lower on Wednesday, posting the biggest one-day percentage loss since September 22 and breaking below its 300-day moving average of $107.08.
U.S. crude was 27 cents higher at $95.22 a barrel, after settling $5.19 lower on Wednesday, dropped below the 200-day moving average of $95.98 and also posting its biggest one-day percentage loss since September 22.
Concern sparked by last week's European Union summit which failed to produce a solution to euro zone's sovereign debt crisis was rekindled on Wednesday by an Italian bond auction.
That has put Thursday's focus on Spain, where the Treasury plans to issue between 2.5 billion euros ($3.3 billion) and 3.5 billion euros in debt maturing in Jan 2016, April 2020 and April 2021.
Italy had to pay a record 6.47 percent on 5-year bonds, offering little relief to investors in the region.
Italy's main employers' lobby, Confindustria, on Thursday slashed its 2012 growth forecast for Italy to -1.6 percent from +0.2 percent and warned that even that estimate was optimistic and based on a gradual easing of the euro zone debt crisis.
Italy is already in recession and will not emerge from it until the third quarter of 2013, Confindustria said.
There is still a lot of uncertainty surrounding Europe and that is worrying investors, said Ken Hasegawa, commodity derivatives manager at Newedge Brokerage in Tokyo.
Although there was an agreement, a lot of countries are involved and they need to get the deal cleared, he said, referring to last week's European summit.
Signs of weakness in the global economy are also upsetting investors. China's factory output shrank again in December, a preliminary purchasing managers' survey showed, reinforcing concerns that manufacturers face waning global demand and tight domestic credit.
Supply concerns arising over Iran as tension in the Middle East over Tehran's nuclear program grows remained a supportive factor.
In a sign the Islamic Republic may struggle to redirect European volumes to Asia in the event of sanctions, Turkey's Halkbank refused to open an account for India's BPCL to settle payments for oil imports from Iran.
OPEC oil producers agreed to an output target of 30 million barrels per day, ratifying current production near 3-year highs, in a deal that settles a 6-month-old argument over supply policy firmly in Saudi Arabia's favor.
But OPEC did not discuss individual nations' quotas, and there remains no mechanism in place to cut quotas should already-fragile demand grow less quickly than expected.
With output from Libya recovering after months of civil war, a lack of a cutback plan may risk a rise in supplies amid slowing demand.
With OPEC agreeing to set a new output target at 30 million barrels per day, broadly in line with the Secretariat's call on OPEC crude for next year, some adjustments to current production allocation between member states will have to be made, analysts at Barclays said in a note.