LONDON: Oil inched above $119 a barrel on Thursday, as optimism over a recovery in the U.S. economy offset the impact of rising global supplies.
The U.S. Federal Reserve said on Wednesday it would support growth in the world's top oil consumer if necessary as it left the door open for another round of monetary easing, raising hopes of higher energy demand.
"Although yesterday's Fed comments put QE3 on ice for some time, it helped yesterday and it is helping today," Commerzbank's head of commodity research Eugen Weinberg said.
"This is even despite the somewhat negative environment given the strong increase in inventories yesterday and possibly the lower geopolitical premium on ongoing talks with Iran."
Brent crude gained 12 cents to $119.24 a barrel by 0817 GMT after settling up 55 cents at $119.12 on Wednesday. U.S. crude was meanwhile 10 cents up at $104.22. The benchmark settled at $104.12, up 57 cents.
Support also came from the dollar index, as it hit a three-week low against a basket of currencies due to the Feds dovish stance on monetary policy.
Dollar-denominated commodities such as oil and gold can sometimes benefit from a weaker greenback, allowing holders of other currencies to buy into the contracts more cheaply.
European shares followed Wall Street higher on the Fed's reassurance and stronger corporate earning figures.
Despite the greater optimism, investors continue to weigh up the likelihood of a euro zone wide recession, with Spain under intense pressure and the Dutch government having collapsed over budget plans.
Later today, participants will be looking to U.S. unemployment claims and pending home sales data for further insight into the health of the world's largest economy.
GEOPOLITICAL PREMIUM The geopolitical premium built into Brent prices, which some analysts peg at around $10 per barrel, is fading as negotiations over Iran's nuclear capabilities continue.
"The geopolitical risk premium is shrinking as negotiations continue the next round of talks scheduled for 23 May," said VTB Capital analyst Andrey Kruychenkov.
Worries that Iranian exports will be embargoed have helped drive oil markets higher this year, but evidence of falling dependency from importers together with rising output from fellow OPEC producers has capped gains.
Tehran's oil sales to most Western destinations have dropped ahead of the July 1 oil embargo, with some Asian buyers pledging to cut back purchases.
Despite being granted an exemption, Japan's customs-cleared crude imports from Iran fell 6.3 percent in March from a year ago, amid tightening Western sanctions that make it difficult to do business with the Islamic Republic.
"While Iranian output has slipped ... Iran's gentle downwards slope has been more than made up by increases elsewhere," said analysts at Barclays Capital in a report.
Total OPEC output is running at about 37.5 million barrels per day, its highest level ever, the report said.
Iran is storing as much as 33 million barrels of crude on tankers as it faces increasing difficulties in selling its oil.
U.S. INVENTORIES
A large buildup in U.S crude inventories is also weighing on prices, although a drawdown in refined fuel stocks provided some relief, U.S. government data showed on Wednesday.
Crude stocks rose almost 4 million barrels in the week to April 20, up for a fifth week in a row, the U.S. Energy Information Administration (EIA) said. The average forecast in a Reuters poll had called for a 2.7-million-barrel build.
U.S. gasoline stockpiles fell by a larger-than-expected 2.24 million barrels, a 10th consecutive week of decline.
