Benchmark West Texas Intermediate for July delivery added $1.89 to settle at $99.59 per barrel on the New York Mercantile Exchange. In London, Brent crude rose $2.43 to settle at $112.53 on the ICE Futures exchange.
Prices climbed early as the dollar fell against other currencies. Oil, which is priced in dollars, tends to increase when the dollar falls and makes crude cheaper for investors holding foreign money.
Oil also got a boost from reports by Goldman Sachs, J.P. Morgan and Morgan Stanley that said prices will almost certainly be higher later this year. The investment banks said the recent 15 percent drop was only a brief pause in what will likely be a long-term rise to near-record levels.
Goldman Sachs expects WTI to hit $135 per barrel by the end of 2012. Morgan Stanley predicts Brent will average $120 per barrel in 2011 while J.P. Morgan said Brent should hit $130 per barrel in the third quarter.
Even though U.S. drivers cut back on gasoline purchases this year as pump prices rose, the rest of the world is expected to keep consuming more. And OPEC countries will have an increasingly tougher time meeting demand for oil, the investment banks said.
"It is only a matter of time until inventories and OPEC spare capacity will become effectively exhausted," Goldman Sachs analyst David Greely said in a research note.
Analyst and trader Stephen Schork said oil prices could possibly rebound to the predicted levels later this year, but that would put extreme pressure on the economy. At those levels for oil, gasoline prices would rise well beyond $4 per gallon - squeezing travel budgets and likely forcing many people to drive less.
"You have to look back at what that means for the consumer," Schork said. "We can get back to those levels, yeah. But I think it occurs at great detriment to the global economic recovery."
MasterCard SpendingPulse, which tracks gasoline purchases at retail stations around the U.S., said Tuesday that demand has dropped for 9 weeks in a row. Its survey showed Americans bought an average of 386 million gallons of gasoline per day for the four weeks ended May 20. That's down about 1.6 percent from the same period last year.
The recent drop in oil has taken some pressure off the economy. Gasoline pump prices fell this month after nearly reaching a national average of $4 per gallon. They fell Tuesday for a 12th straight day to an average of $3.828 per gallon, according to AAA, Wright Express and Oil Price Information Service. A gallon of regular is now 3.2 cents cheaper than it was a month ago but still $1.035 higher than the same time last year.
In other Nymex trading, heating oil added 6.16 cents to settle at $2.9213 per gallon and gasoline futures gained 5.21 cents to settle at $2.958 per gallon. Natural gas lost less than a penny to settle at $4.391 per 1,000 cubic feet.
