Oil rises $2 on U.S. bailout hopes

By Richard Valdmanis

NEW YORK (Reuters) - Oil settled more than $2 higher on Thursday as U.S. lawmakers hammered out a $700 billion agreement to rescue the ailing banking sector.

U.S. Senate Banking Committee Chairman Christopher Dodd said Democrats and Republicans reached a "fundamental agreement" on principles for a bailout bill.

"We are going up because we are rescue happy today. I think people are just kind of getting giddy over the bailout again," said Phil Flynn, analyst at Alaron Trading in Chicago.

U.S. crude settled at $108.02 a barrel, up $2.29, while London Brent crude settled at $104.60 a barrel, up $2.15.

Concerns that the weakening U.S. economy would further undermine energy demand from the world's biggest consuming country had pushed crude down from a record high over $147 a barrel hit in the middle of July.

But efforts to bail out the financial services sector have helped global markets rebound.

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A U.S. government report released on Wednesday showed demand in the top oil consuming nation over the past four weeks running 5.3 percent below last year, hit by high fuel costs and the wider economic crisis.

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Analysts said a slow recovery in oil and gas production in the U.S. Gulf of Mexico from Hurricane Ike, falling U.S. inventories and lower OPEC supplies were also supportive for prices on Thursday.

U.S. gasoline inventories are at their lowest since 1967, according to the U.S. Department of Energy.

But the International Energy Agency said it sees no need to release emergency supplies. "We don't have to mobilize," IEA Executive Director Nobuo Tanaka said. "The market is now taking care of the current situation."

(Additional reporting by Jane Merriman, Joe Brock, Alex Lawler in London and Fayen Wong in Perth; Editing by David Gregorio)