Oil prices rose by more than a dollar on Thursday to top $116 a barrel on renewed hopes for a third round of monetary stimulus by the U.S. Federal Reserve despite weak economic data from China.
Brent crude futures were up $1.06 to $115.97 a barrel by 1155 GMT, having reached $116.38 earlier in the session.
U.S. crude was up 36 cents at $97.62 per barrel, off a three-month high of $98.29 hit earlier.
Investors and traders are betting that additional monetary stimulus is imminent after minutes from the last U.S. central bank meeting were released late on Wednesday.
The minutes noted that many Federal Reserve members "judged that additional monetary accommodation would likely be warranted fairly soon" unless the economy improves considerably.
This is being interpreted as a hint that the Federal Reserve could act at next week's Jackson Hole Symposium, where Chairman Ben Bernanke and European Central Bank President Mario Draghi are scheduled to speak.
Dominick Chirichella, of the Energy Management Institute, noted that Bernanke had announced the second round of quantitative easing at Jackson Hole in 2010.
Further stimulus may weaken the dollar, which in turn will lift commodities priced in dollars, while any boost to the U.S. economy from the stimulus may also drive up oil demand.
"Market sentiment after the Fed minutes suggests we'll see further price gains today," said Carsten Fritsch, an energy analyst at Commerzbank in Frankfurt.
Copper rallied to a one-month high on the news, gold and silver rose to three-month highs and European shares were up in early trading, shrugging off business survey data that suggested that the eurozone was heading for its second recession in three years.
Fritsch predicted that Brent could hit its previous three-and-a-half-month high of $117 a barrel on either Thursday or Friday, given the monetary stimulus hopes.
"It is very likely they will do something if the economy doesn't pick up. But better-than-expected economic data could prevent it," he said.
The market will be looking to U.S. weekly initial jobless claims later on Thursday for further clues. "The labour market is the weak spot in the U.S. economy," Fritsch said.
The forecast is for little change in the data, with initial jobless claims seen at 365,000.
James Bullard, a Federal Reserve official, tried to pour cold water on market expectations of further easing, saying that the meeting minutes were "a bit stale" and data had become stronger since then.
CHINA DATA DISAPPOINTS
The stimulus hopes outweighed disappointing data from China, which signalled that the slowdown in the world's biggest energy consumer had extended into the third quarter.
The HSBC Flash China manufacturing purchasing managers index (PMI) fell to 47.8 in August, its lowest level since November, down from 49.5 in July.
After hovering for several months just below the 50 mark that divides expansion from contraction, the index is now at levels rarely seen since the 2008/09 global financial crisis.
"It is little surprising that much of the weakness came from a deterioration in new export orders, showing the spill-over effect from the weak European economy as well as the recent slowdown in the U.S.," JBC Energy analysts said in a note.
Some traders, however, took the weakness as a sign that China would also have to undertake further monetary easing to try to boost growth while its overseas markets are struggling.
The market was also digesting weekly U.S. data showing a sharp fall in crude oil inventories because of a drop in crude imports. The Energy Information Administration reported a fall of 5.41 million barrels, exceeding consensus forecasts for a 400,000 drop. (Additional reporting by Ramya Venugopal in Singapore; Editing by David Goodman)