Oil rose by more than 2 per cent on Tuesday touching $77 a barrel as optimism about economic recovery and rising demand offset a report showing the pace of oil consumption growth will slow next year.
The International Energy Agency (IEA) increased its estimate for worldwide oil demand growth in 2010 by 80,000 barrels per day (bpd) to 1.77 million bpd, but said this growth would slow by around 400,000 bpd next year.
"The key element is the gradual scaling back of economic stimulus programmes which we are assuming takes place over the next 12-15 months," David Fyfe, head of the IEA's Oil Industry and Markets Division, told Reuters Insider TV.
"That's taking a little of the post-recessionary froth out of the market."
World oil demand is expected to average a record 87.84 million bpd in 2011 but the need for crude from the Organisation of the Petroleum Exporting Countries is expected to rise by just 400,000 bpd next year to 29.2 million bpd, the IEA said, leaving the producer group with plenty of spare capacity.
"In short, markets in 2011 may prove 'not too hot, not too cold'," the IEA said in its first demand projection for next year.
At 1048 GMT, US crude for August delivery was up $1.91 at $76.86 a barrel, having earlier fallen to $74.25. Prices reversed after Asian trade to hit an intraday high of $77.13.
Brent crude oil for August delivery was up $2.01 at $76.38 a barrel. The price for the August contract moved briefly above September on Tuesday as traders bet maintenance in the North Sea would boost the price of Brent in the short-term.
Rising European equity markets supported prices, with many traders focused on companies' financial results as they try to gauge the strength of the recovery and its eventual impact on oil demand.
Alcoa, the largest US producer of aluminium - one of the most energy intensive industrial metals to make -- lifted its outlook for global consumption of the metal and posted surprisingly strong quarterly results, raising optimism others will follow suit.
The US results season officially started on Monday, with the focus now on quarterly reports from JP Morgan on Thursday and General Electric on Friday.
Shares in energy company BP were up as much as 5.5 percent at one stage on Tuesday as it prepared to try sealing off its runaway well in the Gulf of Mexico with a new cap.
Prices were also supported by signs bulging inventories in the world's largest energy consumer may have fallen last week.
US crude stockpiles are predicted to have dropped by 2 million barrels in the week to July 9, a Reuters survey showed, after tumbling 5 million barrels a week earlier because of shutdowns and shipping disruptions related to Hurricane Alex.
US distillate inventories probably rose by 700,000 barrels, the survey showed, while gasoline stocks are expected to have risen by about 300,000 barrels.
The industry group American Petroleum Institute will release its weekly inventory report on Tuesday at 2030 GMT, followed by government statistics from the Energy Information Administration on Wednesday at 1430 GMT.