Oil rebounded towards $86 today after two days of declines, as positive US economic indicators and views that China may revalue its currency bolstered expectations for sustained energy demand growth.
US equities reversed early losses to finish higher yesterday as strength in retail sales boosted optimism about the economy and consumer demand.
The Chinese yuan and other Asian currencies rose briskly as speculation intensified that China might soon revalue its currency and unveil a long-awaited shift in its exchange-rate regime.
"Oil is a dollar-denominated commodity, so if the dollar gets weaker against the yuan, it will be cheaper for China to buy oil," said Clarence Chu, an energy trader at Hudson Capital Energy in Singapore. "In the short term, it could be bullish."
Front-month US crude advanced 34 cents to $85.73 a barrel by 0433 GMT, having touched an 18-month high of $87.09 earlier this week. ICE Brent climbed 37 cents to $85.18.
"The range is pretty tight," Mr Chu said. "People are not really jumping at the market at $87, but at the same time $85 support still holds. Technically speaking, the next resistance level would be $90, but I don't think the market will really rally above that level in terms of fundamentals."
US oil consumption is gradually recovering from a year and a half of declines. Over the past four weeks, total product demand from the world's top user rose 1.9 per cent from a year earlier, the Energy Information Administration said on Wednesday.
But US crude inventories reached their highest level in almost 10 months after rising for 10 consecutive weeks last week, an indication that supply is still outpacing demand.
"If you look at the fundamentals, the market should pull back," Mr Chu said. "We lost so many jobs during the recession that it takes a while for demand to really pick up."
The number of US workers seeking jobless aid unexpectedly shot up last week. However, that did not alter the view that labour markets are recovering as the increase reflected Easter holiday volatility.
China, the world's second-largest oil consumer, has pegged the yuan near 6.83 per dollar since mid-2008 to help its exporters weather the global crisis. But this has drawn increasing complaints from Washington that the yuan is seriously undervalued, handing Chinese firms an unfair trading advantage and effectively exporting unemployment.
The New York Times reported yesterday that Beijing was very close to announcing a "small but immediate" revaluation and would then let the yuan fluctuate more widely.
"China is trying to boost domestic consumption, and domestic consumption is growing," Mr Chu said. "But China is still an export-oriented country. In the longer-term, a revaluation could be a bearish thing for oil."
Reuters