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 By early afternoon in Europe, light, sweet crude for July delivery was up $1.80 to $129.59 in electronic trading on the New York Mercantile Exchange. Earlier in the session, it jumped as high as $130.58 before pulling back as the dollar stabilized against the euro and strengthened against the Japanese yen.
On Thursday, the contract rose $5.49 -- its biggest single-day price increase in Nymex history
-- to settle at $127.79 a barrel. Larger one-day percentage jumps have taken place in the past.
In London, July Brent crude was up $1.52 to $129.06 a barrel on the ICE Futures exchange.
Including gains in the previous floor session, oil prices are now more than $8 higher than at the middle of the week.
The dramatic reversal in what had been a weakening market came after ECB President Jean-Claude Trichet suggested the bank could raise interest rates and the euro climbed against the dollar. When interest rates rise in Europe, or fall in the U.S., the dollar tends to weaken against the euro. Many investors tend to buy commodities such as oil as a hedge against inflation when the dollar is falling.
Also, a weaker dollar makes oil less expensive to investors dealing in other currencies, and analysts believe the dollar's protracted decline has been a major reason why oil prices have nearly doubled in the past year.
"Oil fundamentals had recently started to reassert themselves with worries about demand destruction, but Mr. Trichet chased them away and re-invited financials to the party," Olivier Jakob of Petromatrix in Switzerland said in a research note.
On Friday, the dollar gained on the Japanese currency, changing hands at 106.19 yen from 105.64 yen in New York late Thursday. The euro, meanwhile, was trading at $1.5593, unchanged from the previous session.
Trichet spoke Thursday after the bank left a key interest rate unchanged amid concerns about inflation. While Trichet said a change in rates was not a certainty, he said some of the bank's governors favor an increase.
"Oil, which was very weak, rallied on those comments," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "They're out of step with the U.S., which is weakening the dollar."
Earlier this week, Federal Reserve Chairman Ben Bernanke indicated that more interest rate cuts are unlikely in the U.S., sending the dollar higher and pushing oil prices lower.
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 Oil's decline from the record $135.09 hit May 22, though, has come largely on concerns about slackening demand, and the factors that slashed the prices by more than $10 are still present, analysts noted. They said they were uncertain whether Thursday's trading could be the start of a new surge higher or just an exception.
"The underlying oil fundamentals are, however, unchanged," Jakob said, pointing to worries about falling global demand.
Recent data show high prices have led consumers to cut their gasoline consumption. Meanwhile, Asian countries are cutting fuel subsidies, effectively raising prices, which is expected to further dampen demand.
Protests broke out in India and Malaysia on Thursday as consumers reacted angrily to sharp fuel price hikes that could undermine governments in both countries.
In the U.S., which consumes nearly a quarter of the world's oil, gasoline demand was down 1.4 percent last month from the same period a year earlier. Also, U.S. automakers are cutting production of gas-guzzling SUVs and trucks, and airlines are cutting capacity, both due to high fuel prices and the altered habits of consumers.
In other Nymex trading in Asia, heating oil futures rose 8.93 cents to $3.7701 a gallon while gasoline prices rose 4.30 cents to $3.775 a gallon. Natural gas futures rose 11.7 cents to $12.636 per 1,000 cubic feet.
[Associated Press; By PABLO GORONDI]
AP Business Writer John Wilen in New York and Thomas Hogue in Bangkok, Thailand, contributed to this article.
Copyright 2008 The Associated Press. All rights reserved. This
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