Oil prices rose above $97 a barrel Thursday as a weaker dollar and a surprising fall in U.S. oil inventories offset concerns about the impact of Europe's debt crisis on the continent's economic growth and crude demand.
By early afternoon in Europe, benchmark crude for December delivery was up $1.70 at $97.44 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.06 to settle at $95.74 in New York on Wednesday.
In London, Brent crude was up $1.21 at $113.52 a barrel on the ICE Futures exchange.
The designation of former European Central Bank vice president Lucas Papademos as the new prime minister of Greece and hopes that Italy will fast-track austerity reforms helped boost markets and pushed the euro higher against the U.S. dollar. A weaker dollar often lifts crude prices by making the commodity cheaper for investors holding other currencies.
The euro rose to $1.3633 from $1.3540 late Wednesday in New York, while the dollar dropped to 77.57 yen from 77.85 yen.
Italy remained a focus a concern for investors. The country's president is likely to name a technocratic government headed by respected economist Mario Monti. That helped Italy's borrowing rates to fall on Thursday.
In the longer-term, however, investors worry about how Italy will manage its huge debt pile and revive weak growth. The country's fate is crucial to the eurozone as it is considered too expensive to rescue.
"Crude prices have gathered some modest upside momentum to recover some of (Wednesday's) losses as equities pare losses and Italian debt yields come off their record highs," said a report from Sucden Financial in London. "The darkening state of affairs in the single currency region, and lack of clarity of proposed 'remedies' ... is likely to exert significant downside pressure on crude prices until the prospect of genuine improvement emerges."
Oil prices were also supported by an unexpected fall of U.S. crude oil and distillate stocks — as reported by the Energy Department's Energy Information Administration — interpreted by some as a sign that energy demand in the world's largest economy is on the rise.
Gains were kept in check, however, by a small downgrade of expected global crude demand by the Paris-based International Energy Agency in its latest monthly oil market report released Thursday.
The IEA said the world would need 70,000 barrels of crude a day less in 2011 than previously expected, while demand in 2012 was seen lower by 20,000 barrels a day, mostly on lower consumption in the U.S., China and Japan.
The IEA now assesses global appetite for crude at 89.2 million barrels a day this year and 90.5 million barrels a day in 2012.
In other Nymex trading, heating oil added 3.26 cents at $3.1312 per gallon and gasoline futures rose 1.90 cents to $2.6632 per gallon. Natural gas gained 4.2 cents at $3.694 per 1,000 cubic feet.
Alex Kennedy in Singapore contributed to this report.