Oil recovers towards $125, eyes dollar


05.15.08, 5:00 AM ET

LONDON, May 15 (Reuters) - Oil rose towards $125 a barrel on Thursday as the dollar weakened, recovering after the previous session when rising U.S. fuel inventories sent the market lower.

The dollar fell against the euro after data showing strong German economic growth. Moves in oil and the U.S. currency have grown closely intertwined in recent months as investors use oil as a hedge against the falling dollar.

U.S. crude was up 42 cents a barrel at $124.64 by 0858 GMT. London Brent, whose nearby June contract expires later on Thursday, was up 69 cents at $122.55.

"There is always potential for a rebound. And we really see little downside over the next few months, with prices remaining around where they are now," said Gerard Burg, analyst at National Australian Bank.

Some are even more bullish. UBS (nyse: UBS - news - people ) bank raised its projection for oil prices on Thursday. The bank said oil economist Jan Stuart had lifted its 2008 U.S. crude forecast to $115 a barrel.

The forecast for this year is the most bullish among banks polled by Reuters. UBS previously was the most bearish forecaster in the poll last updated on April 25.

Oil fell on Wednesday after a U.S. inventory report showed a larger-than-expected 1.4 million-barrel rise in distillates stocks, which include heating oil and diesel fuel.

That eased concern about a tightening distillates market that has sent heating oil futures to record highs this week.

Also helping to cap prices, a senior Iranian official said on Wednesday that Iran, the world's fourth-largest oil producer, had no plans to cut exports.

On Tuesday, a report had quoted Iranian President Mahmoud Ahmadinejad as saying a proposal to reduce the country's output was being reviewed by experts.

Oil's rise in recent years has more to do with financial market volatility than fundamentals, Saudi Oil Minister Ali al-Naimi said on Thursday, according to the text of a speech obtained by Reuters.

Naimi and other ministers from the Organization of the Petroleum Exporting Countries have regularly blamed speculators, the weakening dollar and other factors beyond their control for oil's rise to record highs. (Reporting by Maryelle Demongeot in Singapore and Alex Lawler in London, editing by James Jukwey)