Oil up nearly 4 percent on demand optimism, weak dollar

NEW YORK (Reuters) - Oil prices rose nearly 4 percent to top $77 a barrel on Tuesday, gaining for the second session on optimism about economic recovery and weakness in the dollar.

U.S. crude oil futures settled at $77.23 a barrel, up $2.80 or 3.76 percent, the largest percentage gain since September 30, when prices gained 5.8 percent.

In London, ICE Brent crude settled at $76.06 a barrel, up $2.95.

“The outlook is decidedly more bullish for the economy...there is a kind of pent up desire on the part of investors to buy in this market. This is their first chance to have a reason to buy today and so I think that’s a factor here,” said Peter Beutel, president, Cameron Hanover, New Canaan, Connecticut.

“If there are signs that the consumer is coming back, the economy is coming back, these are factors that are working together here to push prices higher.”

Wall Street rose for the second day after positive earnings reports from economic bellwether companies United Parcel Service and Emerson Electric. A rise in pending home sales also helped bolster stocks.

The S&P 500 was up for a second straight day after falling 6.2 percent in the last three weeks of January.

Related Coverage

The dollar dipped as strong corporate earnings and improved economic data boosted risk appetite, supporting oil prices.

Also supportive was news that China’s appetite for foreign oil will stay near record levels in coming months due to a recovering economy and rising refining and stockpiling capacity.

Oil prices continued to be bolstered by Monday’s news that the Institute for Supply Management’s index rose to its highest since August 2004, a sign the world’s top economy is recovering from the deepest recession in decades, which could boost oil demand.

Gasoline futures led the energy complex, likely due to news of a weakening refining industry, analysts said.

“Concerns over continued reports of mothballed refineries not only here in the U.S. but in Europe as well (and) poor downstream results.... I think that’s all feeding into this idea that capacity is going to be constrained and we could get some sort of turnaround in demand that could put pressure on supplies,” Addison Armstrong, director of market research, Tradition Energy in Stamford, Connecticut.

The market was awaiting two sets of weekly U.S. oil statistics, one due later on Tuesday from an industry group and the other on Wednesday from the government.

An employee fills a car with petrol at a gas station in Jammu July 1, 2009. REUTERS/Mukesh Gupta

Analysts polled by Reuters also indicated that refinery utilization rates would remain at 78.5 percent of capacity, the lowest rate in about two decades, not counting hurricane shutdowns.

Sluggish fuel demand has forced refiners to cut back on production and, in some cases, shut plants.

BP Plc BP.L reported a loss in its downstream sector, with refining margins at a 15-year low due to weak demand for fuels and the company's chief executive said margins would likely be pressured by surplus refining capacity for some years to come.

On Monday, top U.S. oil company Exxon Mobil Corp XOM.N also reported losses due to dismal refining margins and Sunoco Inc SUN.N will permanently shut down a part of its refining capacity.

And despite market optimism for oil demand, inventories of oil and refined products remain high.

Analysts in an updated Reuters poll expected the data to show U.S. crude oil and gasoline inventories rose last week, while distillate inventories, including heating oil, were projected to have fallen.

Additional reporting by Robert Gibbons in New York; Ikuko Kurahone in London; Alejandro Barbajosa in Singapore; Editing by Marguerita Choy