By Christopher Johnson
LONDON (Reuters) - Oil prices recovered on Thursday after a two-day slide as the dollar weakened, making fuel less expensive for holders of other currencies.
The dollar has risen more than 4 percent against a basket of currencies (DXY) over the last 10 days, helping accelerate a fall in oil prices from a five-month high early in May.
But the surge in the U.S. currency paused on Thursday, encouraging some oil buying, traders and analysts said.
"Much depends on the U.S. dollar," said Carsten Fritsch, senior oil and commodities analyst at Commerzbank (XETRA:CBKG) in Frankfurt.
"If the dollar resumes its rise, oil will probably test new lows again," Fritsch added.
Front-month Brent
Investors awaited oil inventory data from the U.S. Energy Information Administration (EIA) to see how U.S. production was responding to a recent surge in prices.
Industry group American Petroleum Institute (API) said on Wednesday that U.S. crude inventories rose by 1.3 million barrels last week, following three weeks of withdrawals. [API/S]
If that is confirmed by EIA figures due at 11 a.m EDT (1500 GMT), it could mean U.S. shale oil production has begun to recover after a period of contraction, adding extra pressure to prices.
"The market is trying to anticipate what's going to happen tonight," Phillips Futures analyst Daniel Ang said, referring to the closely watched EIA data.
Analysts said in a Reuters poll on Wednesday that crude stocks in the United States probably fell by 900,000 barrels last week, dropping for a fourth straight week. [EIA/S]
U.S. crude received some support from the start of the summer driving season and raging Canadian wildfires that forced the evacuation of several oil and gas sands production sites.
The fires have forced energy companies operating in Alberta, the largest source of U.S. oil imports, to shut in 233,000 barrels per day of production, or roughly 10 percent of total Canadian oil sands output.