Oil edged higher towards $72 on Tuesday as a forecast for another drop in US inventories helped stabilise a volatile market driven by concerns that Europe's debt crisis would cut into energy demand.

US crude stockpiles probably fell by 900,000 barrels last week as imports likely declined, which would be a second straight week of lower supplies, a Reuters poll showed on Monday.

Industry group the American Petroleum Institute will publish inventory figures on Tuesday at 2030 GMT, while government statistics from the US Energy Information Administration will follow on Wednesday at 1430 GMT.

Finance ministers from the debt-stricken euro zone on Monday agreed how to deploy a vast anti-contagion programme if needed by struggling members, sending the euro and Asian stock markets higher on Tuesday.

Efforts to contain the crisis came after the Hungarian government sent mixed signals about the health of its economy, rattling financial markets and sending crude below $70 on Monday for the first time in almost two weeks.

Prices of front-month US crude, down 18 per cent from a 19-month high above $87 in early May, on Tuesday gained 43 cents to $71.87 by 0424 GMT. ICE Brent crude rose 27 cents to $72.39.

"The heavy sell-off since Friday seems to be finished," said Tetsu Emori, a fund manager at Tokyo-based Astmax.

"The market has been supported by short covering, and some people are feeling that $70 is quite cheap according to market fundamentals. The level of US crude inventory is still quite high, but people are looking at a trend of decreases."

Crude supplies in top consumer the US fell for the first time in seven weeks in the week to May 28, following an almost unbroken stretch of gains going back to late January.

Gasoline stockpiles were forecast up just 100,000 barrels last week, after four straight weeks of drawdowns, including a hefty decline of 2.6 million barrels in the week to May 28.

The forecast for distillate stocks called for an average increase of 600,000 barrels, following a modest build the week before and two consecutive moderate declines prior to that.

Battling risk aversion

Oil prices would stay in the "ideal realm" of $70 to $80 a barrel, a level seen fair by consumers and producers and defended by oil market investors, Saudi Arabia's oil minister said in remarks published on Monday.

US crude dipped briefly below $65 on May 20 as the June contract expired, pressured by record stockpiles at the Cushing, Oklahoma, pricing point.

Hungary's new centre-right rulers, who alarmed markets last week by suggesting the country could face a Greek-style crisis, tried to reassure investors on Monday by pledging to stick to deficit-cutting targets their predecessors agreed to with the International Monetary Fund.

The dollar weakened by more than 0.2 per cent against a basket of currencies on Tuesday, as the euro bounced back from four-year lows, while the Nikkei average rose 0.4 per cent.

Fears about a spreading European sovereign debt crisis, a slowdown in China and a weak US job market have combined to sap investor willingness to take risks for higher returns, prompting them to dump global equities, high-yield bonds, the euro and some commodities.

"Sovereign risk probably will have an impact on the economy, and oil demand in Europe may not be increasing," Emori said, adding that prices could potentially fall below $60 a barrel in the next year.

"Economic indicators in the US are not really improving much," he said.

The US economy added fewer jobs than expected in May, a report showed on Friday, sending equities and commodities markets sharply lower. – Reuters