Oil rebounded above $85 a barrel on Monday after falling sharply from a more than two-year high last week as risk appetite improved and investors looked beyond Irish debt worries to better fuel demand fundamentals.
U.S. crude rose 53 cents to $85.41 a barrel by 1038 GMT (5:38 a.m. ET) while ICE Brent futures rose 67 cents to $87.01.
On Friday, U.S. crude prices fell nearly $3 from a 25-month high above $88 a barrel in a broad commodities sell-off prompted by concerns about Irish debt and talk of a possible Chinese interest rate hike.
An Irish minister reiterated a denial on Monday that Ireland was in direct discussions about a European Union bailout package, but said “continuous talks” were taking place.
Some analysts said the steep price retracement was exaggerated and not justified by better demand data.
“There are worries about European debt and about a China rate hike but any pullback will be short-lived…The International Energy Agency sees demand in 2010 above 2 million barrels a day (bpd) and solid demand in 2011,” said commodities analyst Amrita Sen of Barclays Capital.
The IEA on Friday raised its 2010 oil demand growth forecast by 190,000 bpd to 2.34 million bpd from its previous monthly report on stronger demand in both China and industrialized economies.
Better consumption has prompted a drawdown in oil stocks held on tankers at sea and is now starting to eat into inventories on land.
Analysts said they expect oil prices to now stabilize at near $85 a barrel, leaving levels significantly above the range between $70-$80 where they have mostly traded for the past year.
“I don’t think it’s going to drop. I think there’s quite a firm floor now in the oil price,” said Helen Henton, head of energy and environment research at Standard Chartered.
The negative correlation between oil and the dollar has also temporarily broken down, suggesting that oil is instead focusing on its own improving fundamentals.
The dollar index hit a six-week high on Monday in a move which would ordinarily weigh on oil prices since it deters investors looking for a cash hedge and makes commodities more expensive for holders of other currencies.
“We’ve seen on quite a few days now oil and the dollar strengthen. Oil is reasserting its fundamentals,” said Sen.
A stimulus plan by the U.S. Federal Reserve to buy $600 billion in Treasury bonds to help speed economic growth has helped underpin strength in oil this month.
Traders will later look to October U.S. retail sales at 1330 GMT for further signs of the pace of economic recovery in the world’s top oil consumer.
U.S. growth showed tentative signs of improving last week as jobless benefit claims hit a four-month low.