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Oil prices rebounded to over $74 a barrel Thursday amid renewed hopes about economic recovery after the Fed said the world's biggest economy was improving and President Barack Obama vowed to boost jobs.
By early afternoon in Europe, benchmark crude for March delivery was up 51 cents to $74.18 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.04 to settle at $73.67 on Wednesday, the lowest since Dec. 14 when crude dipped to $73.46.
Obama, fighting to recharge his embattled presidency, pledged Wednesday in his first State of the Union address to get millions of Americans back to work even as he tackles the soaring U.S. deficit.
He also prodded Congress to enact a second stimulus package to help small businesses and funding for infrastructure projects, after bailing out big banks in the past.
The Federal Reserve, meanwhile, promised Wednesday to hold interest rates at near zero to nurture the economic recovery and reduce unemployment. It also said American economic activity "continued to strengthen," a modest upgrade from its previous take on the economy.
The news cheered Wall Street which ended higher Wednesday. Asian and European stock markets are also up Thursday, helping oil prices to reverse their slide.
Oil fell the previous day, dampened by an Energy Information Administration report that demand for crude products had dropped even further from the weak levels of a year ago when the recession's grip on the economy was strongest.
The EIA report showed demand for gasoline fell 0.8 percent over the four weeks ended Friday compared with a year earlier and that demand for distillates used for heating oil and diesel fuel was off 8.1 percent.
Oil prices are about double what they were a year ago and hit a 15-month high earlier this month even though consumption has been awful. Valero, the biggest U.S. refiner, reported Wednesday that it lost almost $2 billion in 2009 as it struggled to pass on higher oil prices to consumers.
Analysts said a quick recovery was unlikely.
"While we are not calling for prices to be sustained at the 1994 levels (about $45 per barrel for the Nymex contract), we still do not see the ingredients that would justify a rapid return to the price levels of 2008," said Olivier Jakob of Petromatrix in Switzerland. "Demand is still a lacking input and both the upstream and downstream spare capacity will not be tested this year or next year."
On a longer term, however, oil prices were seen rising again on increasing demand in the developing world and a renewed flow of investment funds into commodities.
"Prices should not fall that much further," said an energy overview by Mike Fitzpatrick from MF Global in New York. "We still hold that the range will be confined to $67-$72, a base from which a long rally should ensue."
In other Nymex trading in February contracts, heating oil rose 1.52 cents to $1.9320 a gallon, while gasoline added 1.32 cents to $1.9524 a gallon. March natural gas futures slid by 1.7 cents to $5.207 per 1,000 cubic feet.
In London, Brent crude for March delivery rose 56 cents to $72.80 a barrel on the ICE Futures exchange.
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Associated Press writer Eileen Ng in Kuala Lumpur, Malaysia, contributed to this report.
