Oil up 2 percent on weak dollar; threat of supply hikes linger

By Barani Krishnan

NEW YORK (Reuters) - Oil prices rose 2 percent on Tuesday, resuming their rally after a one-day pause, as a weaker dollar boosted commodities denominated in the greenback.

BP Chief Executive Officer Bob Dudley said oil demand could grow enough this year to match supply, remarks that boosted sentiment. Still, analysts warned of possible price wars and excessive supply as Saudi Arabia and Iran tussle for market share.

Brent crude futures' front-month contract was up 90 cents, or 2 percent, at $45.38 a barrel by 10:59 a.m. EDT (1459 GMT).

The front-month contract in U.S. crude's West Texas Intermediate (WTI) futures rose 89 cents to $43.53.

The dollar was down about half a percent against a basket of currencies, on track for its sharpest slide in a week, ahead of a Federal Reserve meeting on Wednesday expected to leave U.S. interest rates unchanged. The dollar rallied earlier this year, weighing on oil, as investors braced for possible interest rate hikes from the Fed's Federal Open Market Committee (FOMC).

"For now, line of least price resistance remains to the upside and we will be reassessing this view in light of tomorrow's FOMC statement," said Jim Ritterbusch of Chicago-based oil market consultancy Ritterbusch & Associates.

Oil prices have risen the last three weeks, with Brent on track to finish April about 14 percent higher for its best monthly gain in a year, despite aborted plans by major producers to agree on an output freeze at a meeting in Qatar this month.

"The biggest bear risk to the oil market right now is that Iran's ramp-up accelerates and then that Saudi Arabia does the same," Citi said in a note to clients.

"If anyone had a doubt about Saudi Aramco's ability to use its logistical system and spot sales to increase market share, its recent 730,000-barrel sale of a cargo to a Chinese teapot refiner in Shandong should lay any doubts to rest," Citi said.

The cargo will be lifted in June from Aramco's storage in Japan's Okinawa prefecture and shipped to China's eastern province of Shandong, Reuters reported.

Citi said it was likely that Saudi Arabia was targeting 500,000 barrels per day in new sales to bring its production up to at least 11 million bpd.

(Additional reporting by Amanda Cooper in LONDON and Henning Gloystein in Singapore; Editing by Dale Hudson, Jason Neely and David Gregorio)