Oil reversed early losses on Wednesday to leap back toward $71 a barrel, as data showing oil demand could be recovering in the United States outweighed doubts about the strength of the global economy.

By 11:00 a.m. EDT, U.S. crude for September delivery was up $1.49 at $70.68 a barrel, having earlier hit a high of $71.35.

London Brent crude for October was up $1.03 at $73.40.

The U.S. Energy Information Administration (EIA) said crude stocks in the world's largest energy consumer fell by 8.4 million barrels last week, confounding analyst expectations for a rise of 1.3 million barrels.

Some analysts urged caution as oil imports to the United States slumped to their lowest level since September 2008, but stocks of gasoline and distillates also fell, boosting the view demand might be bottoming out after being curbed by the recession.

Adding to the bullish mood, the American Petroleum Institute (API) said U.S. oil demand in July showed signs of improvement, with demand down 3 percent year-on-year last month compared with an average drop of around 6 percent in the first half of 2009.

I think these (demand) changes are reflective of an improving economy, but one must be cautious because these changes are versus year ago weak numbers, said API chief economist John Felmy.

STRONG ECONOMY?

Prices had fallen earlier on Wednesday, hitting a low of $68.05 after a near 5 percent slump in Chinese shares sent doubts rippling through global markets about the strength of the world economic recovery.

The good news that has driven markets over much of the summer has been emanating from China, they seemed to be leading the return to global growth, said Paul Harris, head of natural resources risk management at Bank of Ireland Global Markets.

But this is going to be a patchy recovery as we emerge from such a sharp global slowdown -- it's not going to be in a straight line.

The $3 a barrel price reversal was also helped by weakness in the U.S. dollar, which slumped against the euro. A weak dollar tends to boost commodities priced in the greenback as they become cheaper for holders of other currencies.

Jim Ritterbusch, president of Ritterbusch and Associates in Illinois said the jump in prices was not yet warranted by fundamentals alone.

(The) market appears to be overreacting but the weakening dollar is providing a solid base for this price spike, Ritterbusch said.

Traders also watched for storms in the Atlantic Basin but there was no immediate threat seen to U.S. oil installations in the Gulf of Mexico.

Hurricane Bill, the first of the 2009 Atlantic season, grew into a major Category 4 storm on Wednesday, as it moved closer to Bermuda.

(Additional reporting Emma Farge in London; New York energy desk and by Jennifer Tan in Singapore; Editing by James Jukwey)

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