Oil touched a two-week high above $78 a barrel on Wednesday, rising ahead of key inventory data out of the world's largest energy consumer, the United States, later in the session.

U.S. crude for March delivery touched $78.04 a barrel, the highest since January 21, and was trading up 25 cents at $77.48 at 1230 GMT.

London ICE Brent crude for March rose 41 cents to $76.47.

On Tuesday U.S. crude soared 3.8 percent, the biggest gain for a front-month contract since September 30, as the dollar dipped on the back of strong corporate earnings reports that boosted risk appetite and on signs China's oil demand will stay high in coming months.

After a long decline last month and a sharp rebound yesterday, it might be that we have reached a U-turn if the EIA data today is not too bearish, JBC Energy analyst David Wech said.

The U.S. government's Energy Information Administration (EIA) will release stockpile and demand statistics at 1530 GMT, and inventories are expected to have edged up on higher imports, according to a Reuters poll.

The dollar was down 0.1 percent at 78.932 against a basket of major currencies, but was still near a six-month high of 79.534 touched earlier this week.

A stronger dollar makes commodities priced in the U.S. currency more expensive for those holding other currencies.

Volatility for the euro and the yen against the dollar will probably rise in coming weeks, while sterling will probably be less volatile, according to the monthly Reuters foreign exchange poll.

GEOPOLITICAL CONCERNS

On Wednesday Iran, the world's fifth-largest oil exporter, said it had launched a domestically made satellite-carrier rocket carrying live animals into low-earth orbit, a move that may fan concern about Tehran's nuclear intentions.

On Tuesday Iran made conciliatory remarks over its nuclear program, with President Mahmoud Ahmadinejad offering to send the country's low-enriched uranium in exchange for more highly enriched fuel for a medical research reactor.

Western powers accuse Iran of trying to develop nuclear weapons under cover of a civilian enrichment program that Tehran says will fuel a future network of nuclear power plants that will free up domestic oil and gas for export.

We were expecting a tougher stance on Iran in February once France assumed the rotating presidency of the United Nations Security Council, said independent oil analyst Olivier Jakob at Petromatrix.

There were whispers at the end of last week about a meeting with an Iranian delegation and a representative of the French president at Davos, and yesterday's announcement out of Iran fits in with that time frame.

The United States and Israel have not ruled out military action if diplomacy fails to resolve the row over Iranian nuclear enrichment, while for its part Tehran has threatened to hit back at Tel Aviv and U.S. bases in the gulf if attacked.

HIGHER INVENTORIES

In a report late on Tuesday, the American Petroleum Institute (API) said U.S. crude stocks jumped by 4.7 million barrels last week. That compared to an average forecast gain of 200,000-barrel in a Reuters poll.

The API said U.S. gasoline stocks fell 1.2 million barrels and distillate stocks fell by 1 million barrels.

U.S. gasoline stocks were forecast to have risen by 1.3 million barrels in the week to January 29 and total distillate stocks, including heating oil and diesel, were projected to have fallen 1.1 million barrels.

(Editing by Keiron Henderson)

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