Oil rose above $126 a barrel on Friday, extending gains in the previous session after recent declines over the past two weeks. A weaker dollar is making oil futures more attractive to investors.

But the price gains were limited by the concerns that flagging fuel demand did not justify the recent high prices.

Light, sweet crude for September delivery rose 68 cents to $126.17 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract rose $1.05 to settle at $125.49 a barrel on Thursday.

Oil prices fell sharply on Wednesday, tumbling $3.98 to settle at $124.44 a barrel, its lowest finish since June 4. Crude has fallen in six of the past eight sessions, and now sits nearly 15 percent below its peak above $147 a barrel earlier this month.

In London, September Brent crude rose 86 cents to $127.30 a barrel on the ICE Futures exchange.

"The reality is that the fall of US$20 per barrel has been fast and furious and really the fundamentals of the market that drove pricing to above $145 really have not changed," said Victor Shum, an energy analyst with consulting firm Purvin & Gertz in Singapore. "Some market participants simply view this as a 'buy' opportunity."

Investors' short covering — buying back rising securities which they had sold on speculation prices would fall — was another factor behind the rebound, Shum said.

The U.S. dollar was weaker against the euro and the Japanese yen on Friday, after a U.S. real estate trade group reported that sales of existing homes dropped nationwide by 2.6 percent in June, more than double the decline that had been expected.

As a result, the inventory of unsold homes in the United States inched up to 4.49 million units, representing an 11.1 month supply at the June sales pace, the second-highest level in the past 24 years.

At midday in Europe, the euro was up to $1.5737 from $1.5679 late Thursday in New York, while the dollar fell to 107.13 Japanese yen from 107.29 yen in the previous session.

Investors turn to oil and other commodities as a safeguard against inflation and a weaker U.S. dollar. When the dollar strengthens, it usually has a bearish effect on oil prices.

The rebound in crude prices, however, remained limited by concerns about demand destruction.

"U.S. oil consumption is down on the levels of a year ago and I think there is evidence of some adjustments in response to the high level of oil prices," said David Moore, a commodity strategist with Commonwealth Bank of Australia in Sydney.

Americans used 2.4 percent less fuel over the past four weeks than they did a year ago, the latest figures by the U.S. Energy Department's Energy Information Administration show. While that may not sound like much, industry experts say it represents a significant shift by the world's largest energy consumer, especially during America's summer driving season.

Data also showed a bigger-than-expected increase in U.S. gasoline supplies, adding to concerns that drivers are cutting back.

Investors remained on guard over a threat Wednesday by Nigeria's main militant group that it will destroy major pipelines in the oil exporting country within 30 days. The threat — which only weeks ago might have caused oil prices to spike — did little to push crude higher.

In other Nymex trading, heating oil futures rose 2.19 cents to $3.5890 a gallon while gasoline prices gained 1.31 cents to US$3.0725 a gallon. Natural gas prices had recovered 9.2 cents to $9.415 per 1,000 cubic feet.

On Thursday, natural gas futures tumbled 46.5 cents to settle at $9.283 per 1,000 cubic feet, its lowest point since March, as a three-week sell-off of that fuel continued unabated.

Natural gas fell after the EIA said in its weekly report that natural-gas inventories rose by 84 billion cubic feet to nearly 2.4 trillion cubic feet last week.

Investors hoping for an uptick in demand — and a reason to stop the fossil fuel's sharp decline — were looking for signs of a slower build.