Oil prices rose toward $80 a barrel to hit the highest level since early May as upbeat corporate results and rallying equities increased risk appetite for the commodity.

U.S. stock index futures jumped on Tuesday, setting Wall Street for a fourth straight day of gains, while European shares touched a five-week high.

Rallying U.S. stock markets are seen as a broad indicator of the future oil demand picture in the world's top consumer and helped to banish persistent fears of a double dip recession.

U.S. oil prices rose 14 cents to $79.12 a barrel by 9:38 a.m. EDT after earlier trading at $79.69 a barrel -- the highest intraday level since May 6.

Earlier, prices had turned negative as more oil production capacity shuttered in the U.S.-regulated areas of the Gulf of Mexico started coming back onstream.

ICE Brent rose 26 cents to $77.76 a barrel by the same time.

I think you are looking at a situation whereby equity markets and oil which have developed a positive correlation, said Harry Tchilinguirian, head of commodity strategy at BNP Paribas.

He added that expectations the United States will start printing more money in a second round of quantitative easing has increased the appeal of riskier asset classes.

News that U.S. home prices rose more than expected in May also helped sentiment on Tuesday, adding to signs that the economic recovery is intact.

PRICE JUNCTURE

Oil prices are now at a critical juncture and it remains to be seen if they will break into a new range above the $70-$80 a barrel area where they have traded since early June, analysts said.

It's a mixed set of signals. The market is considering a move above $80 and if they do it will be seen as a positive sign. Should they stay below $80 a further drop cannot be ruled out as people will point to a double dip recession and a Chinese slowdown, said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt.

Some technical analysts think oil prices could soon test the $80 a barrel range following a breach of the key 200-day moving average technical level last week

Industry group the American Petroleum Institute will publish data on U.S. inventories at 2030 GMT on Tuesday, followed by government statistics from the Energy Information Administration on Wednesday.

U.S. crude oil inventories probably fell 1.8 million barrels last week, a Reuters survey showed, while supplies of distillate fuel, including diesel, may have climbed for the ninth consecutive week and gasoline for the fifth, even as summer demand peaks.

Iran said on Monday it was ready to return to talks on a nuclear fuel swap, a surprise that came shortly after the European Union agreed tougher sanctions, including a block on oil and gas investment.

There is some suggestion that Iran might be giving up. This could lead to a decrease in the risk premium in the market but it's not clear yet, said Weinberg.

(Additional reporting by Alejandro Barbajosa in Singapore; editing by Anthony Barker)

BNP Paribas