Oil rose by almost $2 a barrel on Tuesday after a large interest rate cut by Australia's central bank aroused hopes that other policymakers would follow suit to stem the credit crisis.
The gain recouped some of the loss on Monday, when oil slid by $6 as an international market rout sparked concerns that oil demand could be eroded further. But traders were sceptical the rally would last.
"It's a bit of a recovery, but hardly anything to speak of after very steep falls," said Christopher Bellew, a broker at Bache Commodities.
"It would be foolish to think the dawn has come in terms of oil prices going back up again."
U.S. crude was up $1.85 at $89.66 a barrel at 0821 GMT. It settled down $6.07 at $87.81 on Monday after hitting an eight-month low of $87.56. London Brent rose $1.51 to $85.19 a barrel.
Australia's central bank surprised the market with its biggest interest rate cut in 16 years on Tuesday, a 1 percentage point reduction in the Reserve Bank of Australia's benchmark cash rate.
Investors expect the Bank of England to cut rates at its policy meeting this week and are pricing in cuts from the U.S. Federal Reserve and the European Central Bank in the near future.
Even so, analysts said concern remained about the economic outlook and the weakening prospects for oil demand.
"People are still very worried about the outlook for the international economy," said David Moore of the Commonwealth Bank of Australia.
Oil has plummeted from a record high of $147.27 a barrel hit in July as high fuel prices and the growing financial crisis slow oil demand in top consumer the United States and other industrialised nations.
Analysts are watching oil demand from China — which helped drive oil's rally from $20 in early 2002 — for signs the crisis is hitting consumption in the world's second-largest consumer.
Oil's drop has caused worry for some members of the Organization of the Petroleum Exporting Countries. An Iranian official said on Tuesday Tehran was concerned about demand as the global financial crisis deepens.
News that Mexico's state-owned oil company Pemex was evacuating four offshore oil platforms due to tropical storm Marco could become supportive for prices.
