Oil rose 1.5 percent on Wednesday as a stock market rally raised optimism about the economy, offsetting concerns about rising inventories and weak demand in top consumer the United States.
U.S. crude gained $1.05 to trade at $70.50 a barrel by 1:55 p.m. EDT. London Brent crude rose 65 cents to $73.11 a barrel.
The gains came as global stock markets posted a broad rally, led by technology and home-building shares after positive outlooks from semiconductor product manufacturer Applied Materials Inc and luxury home builder Toll Brothers Inc. <.N>
It's pretty clear that the fundamental picture remains bearish, but it remains to be seen when crude prices will react accordingly, since they have continued to react to (a rise in the) S&P stocks and the weakening dollar, Addison Armstrong, director of market research at Tradition Energy, said.
The dollar slipped from a 1-1/2 week high against the euro on Wednesday with investors cautious ahead of the U.S. Federal Reserve's policy statement due later in the session.
Adding some support, the National Hurricane Center said the Atlantic could get its first named storm of the year as a tropical depression strengthens on a track toward the U.S. Virgin Islands.
Tropical storms and hurricanes can disrupt the operations of offshore oil platforms and coastal refineries.
Oil's strength came despite a report from the U.S. Energy Information Administration showing U.S. crude oil inventories rose 2.5 million barrels in the week to August 7, well over analysts' expectations for a 700,000 barrel build.
The build came as U.S. refiners cut back on runs with the recession keeping total product demand below year-ago levels.
The Federal Reserve is expected to end its buying program of long-term government securities at a meeting that concludes Wednesday, but keep U.S. interest rates steady at near zero amid signs the economy is stabilizing from the deep recession.
Despite some positive economic signs, the International Energy Agency (IEA) forecast global oil demand growth will be lower in 2010 than previously expected, with little evidence a recovery is under way yet.
The Paris-based agency, adviser to 28 industrialized nations, said global oil demand was now seen recovering by just 1.3 million barrels per day (bpd) in 2010, having fallen by 2.3 million bpd this year as the economic crisis curbed consumption.
Evidence of a bottoming out of the recession is still a bit patchy. The latest data on industrial production for some of the larger countries remains negative, David Martin, analyst at the IEA, told Reuters.
There is not clear evidence yet we have seen the worst.
(Reporting by Matthew Robinson, Robert Gibbons, Richard Valdmanis and Gene Ramos in New York City; David Sheppard in London; Maryelle Demongeot in Singapore; Editing by David Gregorio)