Oil reverses course and rises as dollar backs off highs

By Amanda Cooper

LONDON (Reuters) - Oil rose on Thursday, reversing early losses, aided by a drop in the dollar that helped focus investors' attention on a probable decline in U.S. crude inventories.

Brent crude futures were last up 13 cents at $65.55 a barrel by 1500 GMT, as were West Texas Intermediate (WTI) futures which were last at $61.81 a barrel.

The dollar eased back from earlier one-week highs after minutes from the European Central Bank's most recent policy meeting gave the euro a boost.

Since the dollar began to grind higher a few weeks ago, the oil price has lost nearly 10 percent since hitting a multi-year high above $70 in January.

"Given the market's whipsaw reaction we could add another key takeaway, that recent heightened market volatility could be here to stay," LCG markets strategist Jasper Lawler said.

The correlation between moves in the oil price and the dollar has strengthened in the last couple of weeks, as investors increasingly sell other assets to buy the U.S. currency on expectations of a faster pace of rate rises.

With so much focus on the relationship between the dollar and other assets, a surprise drop in U.S. crude inventories, as reported by the American Petroleum Institute (API) on Wednesday went largely unnoticed for most of the day.

Once the dollar retreated, the potential for the U.S. Energy Information Administration to also report a seasonally unusual decline in stocks gave the oil market an additional boost.

The API reported an unexpected drop in U.S. crude oil inventories by 907,000 barrels to 420.3 million barrels for the week to Feb. 16.

Inventories usually rise at this time of year, as many refineries cut crude intake to conduct maintenance, but a bottleneck in Canada's pipeline system has reduced U.S. imports and pushed U.S. stocks lower.

"Improved pipeline infrastructure to the Gulf coast and the decreased supply via TransCanada's Keystone pipeline, sent ... inventories tumbling," Innes said.

But analysts said oil markets were still generally well supported due to rising demand for crude and production restraint led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia.

"OPEC production curbs have stabilised the market. Adherence to (the) agreement has been relatively good," Daniel Hynes, senior commodity strategist at ANZ bank, said in a report on Thursday.

(Reporting by Amanda Cooper; Editing by Jason Neely and Mark Potter)