Oil rose on Tuesday to above $31 a barrel on hopes that OPEC and non-OPEC producers were inching closer to a deal to reduce output in the face of one of the biggest supply gluts in decades.
The Organization of the Petroleum Exporting Countries is making renewed calls for rival producers to cut supply alongside its members, but Russia, seen as key to any deal, has so far refused to cooperate.
Iraqi Oil Minister Adel Abdel Mahdi said on Tuesday he saw "some flexibility" for a deal, an idea has been repeatedly mooted and dismissed for over a year.
Brent crude was up $1.02 at $31.52 a barrel by 11:05 a.m. EST (1605 GMT), rebounding from a decline earlier in the session. On Jan. 20, Brent reached as low as $27.10, its lowest since November 2003.
U.S. crude was up 91 cents, or 3 percent, at $31.25 a barrel.
"Without a production agreement, fundamentals point to lower numbers," said David Hufton of oil brokers PVM. "With one, oil becomes a $40-to-$60-a-barrel market."
Tuesday's rally was limited, with oil prices also pressured by weakness in Asian stock markets. China, the No. 2 oil consumer, posted an 11.9 percent drop in rail freight volume in 2015, feeding worries of a global economic slowdown.
Despite a roughly 20 percent slide in oil prices this
year, major OPEC producers have not cut back on investment plans. Instead, some plan to boost supply, as an Iraqi official said Monday his country would do after it reported record production at the end of 2015.
"Yet for at least this week, even with an expected increase in supply, we should see storage fall in Cushing Oklahoma as Canadian oil sands producers start to cut output," said Phil Flynn, analyst at the Price Futures Group brokerage in Chicago.
The American Petroleum Institute, an industry group, releases its supply report at 4:30 p.m. EST (2130 GMT) and the government's data is due on Wednesday.
Traders are watching the dollar before the U.S. Federal Reserve policy meeting starts later on Tuesday, the first since the central bank raised interest rates in December.
The recent strength of the dollar has added to oil's woes as it makes it more expensive for countries using other currencies to buy fuel, potentially hurting demand.
Oil markets have also been pressured lately by several brokerages and banks scaling back their outlooks for 2016.
World Bank economists slashed their 2016 oil price forecast on Tuesday, saying weak demand would continue even as oil supply
grows with the resumption of Iranian exports, continued U.S. production and a mild Northern Hemisphere winter.
(By Devika Krishna Kumar, Additonal reporting by Alex Lawler in London and Meeyoung Cho in Seoul)