Perth - Oil prices rose toward $71 a barrel on Tuesday, helped by a fall in the dollar after a newspaper report that Gulf Arab states were in secret talks to replace the US dollar with a basket of currencies in oil trading.
A bounce in the Asian stock markets, spurred by a positive U.S. services sector report, also helped to improve investors' mood and rekindled hopes the recovery in the world's largest economy was gaining traction.
US crude for November delivery rose 36c to $70.77 a barrel by 06:54 GMT, after gaining 46c to settle at $70.41 on Monday. London Brent was up 26c to $68.30.
"Oil is taking directions from the US dollar. But prices are still trading sideways and it may be hard for prices to break out of the $75 mark until there are convincing signs of a sustained demand recovery," said David Moore, a commodities analyst at the Commonwealth Bank of Australia.
Oil prices rose slightly on Monday after data showing the US services sector expanded for the first time since August 2008, fuelling optimism that energy demand would soon recover on the back of an improving economy.
Traders have been looking to macroeconomic data and equities markets for signs of a potential end of the recession that could boost consumption and draw down high oil inventories.
US crude and product inventories likely rose last week, according to a preliminary Reuters poll of analysts. The American Petroleum Institute will release its inventory report on Tuesday at 4:30 p.m. EDT (20:30 GMT), while the US Energy Information Administration (EIA) will issue its own supply data on Wednesday.
The dollar fell on Tuesday after Britain's Independent newspaper reported that Arab states were in talks to end the use of the dollar for oil trading.
Quoting unnamed sources, including Gulf Arab and Chinese banking sources, it said Gulf Arab states were in secret talks with Russia, China, Japan and France "to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf".
However, Saudi Arabia's central bank chief said on Tuesday that the report was "absolutely incorrect", while Algeria's finance minister said there was no need for a new currency in oil trade.
Analysts said ending the use of the dollar as the currency used to settle oil trades between countries would be an easy task, but a move to replace the currency in which oil is priced would require a massive effort.
"First they will need to select a basket of currencies and issues surrounding that are: which are the currencies to be included in the basket and what ratios to use?" said Victor Shum, an energy analyst at Purvin & Gertz Consultancy.
"It's already a big hurdle just to move oil from one currency to another, let alone a basket of currencies. If there was already a significant proportion of global oil trade being priced in non-US dollar now, than perhaps there would be more pressure to price crude in another currency. But we're still far from that."
Investors will keep a close watch on the US weekly retail sales data, the EIA energy outlook for October and the US API weekly crude stocks report to uncover more clues on the pace of recovery in the world's largest energy consumer.
Oil gained nearly 6% last week, largely bolstered by a US government report mid-week showing a surprise drop in gasoline inventories as well as tensions between key oil exporter Iran and the West over Tehran's nuclear programme.
- Reuters