Crude oil prices jumped by more than $2 a barrel on Wednesday off multimonth lows as the prospect of peace talks between Ukraine and Russia combined with strong U.S. economic data to raise demand expectations.
New orders for U.S. factory goods jumped in July and automobile sales in August were unexpectedly robust, offering further signs of strength in the manufacturing sector.
President Vladimir Putin outlined plans for a ceasefire in eastern Ukraine on Wednesday but Ukraine's prime minister dismissed the proposal, while France expressed its disapproval of Moscow's support for separatist forces by halting delivery of a warship.
After speaking to Ukrainian President Petro Poroshenko by phone, Putin said he believed Kiev and pro-Russian separatists could reach agreement at planned talks in Minsk on Friday.
"If the ceasefire holds, sanctions will be lifted and that will mean more economic activity. We've gone from a situation where we'd lowered demand expectations to rising demand," said Phil Flynn, an analyst at the Price Futures Group in Chicago.
U.S. crude settled up $2.66 at $95.54 a barrel, recapturing nearly all of the more than $3 it shed on Tuesday when it neared a nine-month low. Markets were closed on Monday for a U.S. holiday.
Brent crude rose by $2.43 to settle at $102.77 at 11:41 a.m. EDT (1541 GMT) after settling at its lowest since May 1, 2013, on Tuesday.
A weaker dollar and expectations of a decline in U.S. crude inventories further supported oil prices, which on Tuesday had plummeted in reaction to a sharp gain in the dollar and concerns over slowing oil demand growth in China and Europe.
"You would expect the market to bounce after such a major downward move yesterday," said Tony Machacek, a broker at Jefferies in London. "Fundamentally, the oil market is well supplied and the indications are prices are still in a downtrend."
Investors have mostly discounted threats to supplies from conflict in the Middle East and North Africa, focusing instead on the lack of further disruption to oil flows in Iraq and rising output in Libya.
The latest U.S. inventory reports are expected to show crude and refined fuel stocks dropped last week, according to a Reuters survey, potentially supporting prices. [EIA/S}
A weekly report from the American Petroleum Institute report, an industry group, is due at 4:30 p.m. EDT while the more closely watched update from the government's Energy Information Administration is due on Thursday. Both are delayed a day due to the Monday holiday.
(By Anna Louie Sussman; Additional reporting by Alex Lawler and Jacob Gronholt-Pedersen; editing by Michael Urquhart, G Crosse, Jane Baird and Andrew Hay)