Oil prices rose above $71 per barrel on Tuesday as the dollar slipped against major currencies and after a U.S. government agency raised its forecast of world oil demand for the fourth quarter.

The dollar fell after a report in Britain's The Independent newspaper that Gulf Arab states were in talks to replace the U.S. unit with a basket of currencies for oil trading.

The report was swiftly denied by senior officials from leading oil producers Saudi Arabia, Russia, Kuwait and the United Arab Emirates but still helped push up the dollar against a range of major currencies.

Stronger stock markets, spurred by expectations of a faster-than-expected recovery in the U.S. economy, also bolstered oil prices.

U.S. crude for November rose $1.22 to a high of $71.63 per barrel before slipping back to around $71.20 by 1257 GMT (8:57 a.m. EDT). Brent crude was up 80 cents at $68.84.

I think the dollar weakness is the main reason pushing oil prices higher today, but I can't imagine this story will support for very long or in the coming days, said Carsten Fritsch, oil analyst at Commerzbank.

Quoting unnamed sources, including Gulf Arab and Chinese banking sources, The Independent said Gulf Arab states were in secret talks with Russia, China, Japan and France to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf.

ABSOLUTELY INCORRECT

But Saudi Arabia's central bank chief said the report was absolutely incorrect, while Algeria's finance minister said there was no need for a new currency in oil trade.

Because oil is denominated in dollars for global trading, it tends to go up when the U.S. currency falls as the commodity becomes cheaper for holders of other currencies.

Analysts said ending the use of the dollar to settle oil trades between countries would be fairly easy, but replacing the currency in which oil is priced would require a massive effort.

These ideas have been talked about before but have never yet come to anything, said David Wech, analyst at JBC Energy in Vienna. This may have speculative impact in the short-term perhaps, but this is about a very long-term project.

Also supporting oil on Tuesday was the monthly energy forecast from the U.S. Energy Information Administration, which raised its outlook for world oil demand at the end of this year as the economy improves in China and other Asian countries.

The agency said it expected a 410,000 barrel per day increase in demand in the fourth quarter of 2009 from the same period a year ago. A previous forecast estimated just a 240,000 bpd rise in fourth quarter demand.

The EIA also raised its forecast for OPEC and non-OPEC crude oil production for next year.

Dealers said oil prices appeared to be in a trading range of $65 to $75 a barrel with little sign of a break-out.

Weak demand data is stopping prices rallying and maybe fund support is stopping it sinking, said Christopher Bellew, oil broker at Bache Commodities in London.

U.S. crude and product inventories likely rose last week, according to a preliminary Reuters poll of analysts.

The American Petroleum Institute will release its inventory report on Tuesday at 2030 GMT (10:30 a.m. EDT), while the U.S. Energy Information Administration (EIA) will publish its supply data on Wednesday. (Additional reporting by Joe Brock; editing by Keiron Henderson)

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