Oil hovers near $87 on renewed economic hopes

By early afternoon in Europe, benchmark oil for January delivery was down 10 cents to $86.65 a barrel in electronic trading on the New York Mercantile Exchange. The contract surged $2.64 percent, or 3.1 percent, to settle at $86.75 on Wednesday.

Improved manufacturing activity in the U.S. and China, job gains among small U.S. businesses and higher U.S. work force productivity revived confidence in the global economic recovery, giving a lift to oil.

"We are maintaining a bullish trading posture in anticipation of a further crude price advance to the $90 area. But, at the same time, additional price advances could prove erratic and one more dip toward the $85 area could be forthcoming before this market is ready to make another run," Ritterbusch and Associates said in a report.

Oil has been trading between $81 and a two-year high of just above $88 a barrel in the past month.

Goldman Sachs predicted prices could breach the $100 level next year amid strong growth in demand. It said world oil demand, which expanded at a higher-than-expected 2.4 million barrels a day this year, was likely to be sustained at over 2 million barrels a day over the next two years.

Some analysts warned that economic risks, especially the European debt crisis and the possibility of further credit tightening in China, cast a shadow over such bullishness. The European Union agreed on bailout loans for Ireland over the weekend.

Oil prices were supported by a weaker dollar, which lost ground to the euro on expectations that the European Central Bank will announce new measures on Thursday to help limit the eurozone's debt crisis.

"Investors may be concluding that the ECB will have to do much more for the region given the poor marks doled out by the markets on its handling of the Irish package," said senior commodity analyst Edward Meir at MF Global in New York.

The euro rose to $1.3158 on Thursday from $1.3132 late Wednesday in New York.

In other Nymex trading in January contracts, gasoline was up 1.21 cents to $2.3125 a gallon and heating oil gained 0.37 cent to $2.4093 a gallon. Natural gas rose 4.7 cents to $4.316 per 1,000 cubic feet.

In London, Brent crude rose 22 cents to $89.09 a barrel on the ICE Futures exchange.

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Associated Press writer Eileen Ng in Kuala Lumpur, Malaysia, contributed to this report.