LONDON: Brent crude futures turned positive on Wednesday as the dollar index slipped in a volatile trading session, while the focus remained on the latest weekly reading of United States oil stocks due out later in the day.
Oil prices seesawed with the dollar index, which fell 0.17 percent as it tries to recover from a three-year low, with Brent reversing earlier losses to trade in positive terrain.
By 0950 GMT, US light crude futures were down 7 cents at $110.98 a barrel, while ICE Brent crude futures were 25 cents firmer at $122.70 a barrel.
A weaker dollar can lift greenback-denominated commodities by rendering them more appealing to holders of other currencies.
"The stronger dollar since yesterday has contributed to the oil price decline as it has contributed to the general decline in commodity prices," Commerzbank analyst Carsten Fritsch said.
Oil prices dropped more than 2 percent on Tuesday, as an interest rate increase by India added to concerns about demand and gains in the dollar helped spark a technical sell-off.
A broader sell-off in commodities that dragged equities lower dampened investor appetite for risk-taking, after fear that huge price gains last month had made everything from oil to silver too costly.
"We had a very strong correction in precious metals, especially in silver this week, and that has somehow contributed to put pressure overall on commodities and oil from a technical perspective," Petromatrix's analyst Olivier Jakob said. Brent crude is forecast to fall further to $119.03 per barrel, while US crude futures are headed to $108.00, said Reuters market analyst Wang Tao.
On the supply front, the American Petroleum Institute (API) said crude stocks rose by 3.2 million barrels for the week ended April 29, contrary to analyst expectations for a gain of 2.0 million barrels.
This came even as crude imports fell by 1 million barrels per day last week to 8.94 million bpd.
The US Energy Information Administration's (EIA) report will be released on Wednesday at 1430 GMT.
CHINA INFLATION, FEAR PREMIUM China is expected to further tighten monetary policy to curb inflation, a move that could dampen demand in the world's biggest energy consumer.
The official China Securities Journal cited central bank vice governor Yi Gang as saying China would keep mopping up excess cash in the economy by raising cash reserve requirements for banks.
In a separate story, the publication cited industry analysts as predicting the central bank would rise required reserves again in May, its fifth time this year, to absorb some of the money created from hefty foreign inflows this year. However, the impact on oil prices was likely to be muted, given the strength of Chinese demand, analysts said.
"We have already seen some moderation in economic activity in China, but the oil market has not seen any obvious slowdown despite previous tightening," said Barclays Capital commodities analyst Yinxi Yu. "It is necessary to rein in the overheating economy. Chinese oil demand grew at 1 million barrels per day in Q1, so slowing down is a healthy move."
Analysts said a fear premium was in place due to ongoing tensions in oil-producing regions of North Africa and the Middle East and the recent death of al Qaeda leader Osama bin Laden.
"There's a $20 premium built in the price due to the Middle East crisis and potential reprisals following bin Laden's death.
That will provide a floor to prices for some time to come," said CMC's Le Brun.
Bin Laden was killed in a US special forces assault on a Pakistani compound, then quickly buried at sea, ending the long manhunt for the al Qaeda leader who had been the guiding star of global terrorism.
World leaders hailed bin Laden's death but the euphoria was tempered by fears of retaliation.
In Libya, there was no let-up in the conflict as fighting between rebels and forces loyal to Muammar Gaddafi forced thousands of refugees to flee western Libya on foot to the Tunisian border and by boat to Europe, the United Nations said on Tuesday.
OPEC output fell to a 23-month low in April as extra oil from Saudi Arabia and Nigeria did not make up for supplies lost due to fighting in Libya and oilfield maintenance in Angola, a Reuters survey found on Tuesday.
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