Oil rose above $126 a barrel this morning extending a rebound a day earlier that helped stem a nearly two-week dive as buyers crept back into the market before the weekend, superseding lingering demand worries.
Concerns that high prices and a weaker US economy will undermine demand have driven oil down more than $20 from a record peak above $147 a barrel set earlier this month, but technical trading and a short-covering bounce helped buoy prices yesterday.
US light crude for September delivery rose 66 cents to $126.15 a barrel by 6.26am after gaining $1.05 a barrel a day ago, recovering from a seven-week low.
London Brent crude rose 52 cents to $126.96 a barrel.
US stock markets fell by 2 per cent or more a day ago after news of another drop in US home sales, adding to the gloom surrounding the outlook for the world's top oil user.
"Since the source of much of the selling of the past one-and-a-half weeks has been the heightened attention to demand deterioration, we look for this market to place greater emphasis on sharp stock market sell-offs than currency movements going forward," said Jim Ritterbusch, president of Ritterbusch & Associates.
He added he expected crude could drop as low as $117 within about a week.
Some analysts say the price drop in oil and other commodity markets since mid-July has been driven by some traders unwinding short-dollar/long-oil positions, which has also helped lift the US currency to a one-month high against the yen.