Brent futures held near $109 a barrel on Tuesday as forecasts of a third straight drop in weekly U.S. crude inventories raised hopes of a steady revival in demand growth in the world's biggest oil consumer.
Confirmation later in the day of the expected fall may push the U.S. oil benchmark to a new high for the year, but further gains in the dollar may overshadow those numbers.
Brent crude rose in early trade as high as $109.22 a barrel - just off a three-month high hit on Monday - and was trading down 16 cents by 0402 GMT at $108.93.
U.S. oil slipped 27 cents to $106.05, down more than a dollar from this year's high of $107.45 touched on July 11.
"If the (inventory) forecast is confirmed, we may see U.S. futures rise above $108 a barrel and touch a new high for the year," said Ryoma Furumi, a commodity sales manager at Newedge in Tokyo. "But without any other fundamental factors, broader macroeconomic data and numbers will influence oil for today."
Data continues to be mixed, however, with U.S. retail sales rising less than expected in June, while a separate report showed factory activity in New York state accelerating in July.
Investors are for now sticking with the view that the Federal Reserve will start reducing its bond buying this year and scrap it by mid-2014, with no surprises expected from Chairman Ben Bernanke's testimony on Wednesday.
The dollar held to a moderate recovery from last week's sell-off, helping to cap any further upward moves in oil. A strong greenback makes it more expensive for holders of other currencies to buy dollar-denominated commodities and usually pressures prices lower.
U.S. commercial crude stocks likely fell 2 million barrels on average for the week ended July 12, a Reuters poll of eight analysts showed.
U.S. crude inventories plunged 20 million barrels over the previous two weeks, the deepest two-week draw on record, Energy Information Administration data showed on July 10. Inventories at the Cushing hub have also dropped to the lowest this year.
Industry group the American Petroleum Institute (API) will release its stockpile report later on Tuesday, which will be followed by data from the U.S. Department of Energy's Energy Information Administration (EIA) a day later.
Oil futures are also still drawing support from concerns over supply disruption as investors watch the unfolding regime change in Egypt, where police fired tear gas on Monday at Cairo protesters calling for the reinstatement of the ousted Islamist president, Mohamed Mursi.
"Geopolitical tensions have been put aside somewhat, but they are always running in the back of the mind of people," Furumi said. "It won't take long for these worries to come to the forefront."
Brent seems to be forming a peak around $109.51 as indicated by its wave pattern and the hourly RSI, while a bullish target of $109 has been established for U.S. oil, according to Reuters technical analyst Wang Tao.