Benchmark crude for September delivery rose $1.37 to settle at $78.36 a barrel on the New York Mercantile Exchange.

Oil also benefited from a slight decline in new unemployment claims and a weaker dollar. Commodities like oil are priced in dollars. A weaker dollar makes commodities more attractive to buyers holding foreign currency.

Oil traders have been closely watching the movement of the dollar, stock markets, earnings and economic data for clues about investor sentiment and the strength of the U.S. and global economies.

In a research report Barclays Capital said the main driver of oil prices has been skittishness about the economic recovery. "It may take a while before the ghosts from the previous crisis go away entirely," it wrote.

Exxon Mobil Corp.'s second-quarter income nearly doubled to $7.56 billion as oil prices increased from last year. It was Exxon's highest quarterly profit since the $7.82 billion it earned in the last three months of 2008.

Southwest Airlines reported second-quarter earnings of $112 million. It credited a 21 percent increase in revenue to higher average fares.

In other energy trading, natural gas rose as the government said reserves grew by 28 billion cubic feet to 2.919 trillion cubic feet last week. Supplies remain about 9 percent above the five-year average.

Analysts said reserves typically rise more this time of year. A heat wave that has Americans turning on air conditioners is forcing power companies to burn more gas to generate electricity. Reduced production in the Gulf of Mexico last week due to Tropical Storm Bonnie also slowed the expansion of natural gas reserves.

Natural gas for September delivery rose 10.9 cents to $4.827 per 1,000 cubic feet.

In other Nymex trading, heating oil for August delivery added 4.08 cents to $2.0372 a gallon. Because that contract expires on Friday, much of the trading has moved to the September contract, where the price gained 4.36 cents at $2.0696 a gallon.

The August contract for gasoline, which also expires Friday, rose 3.4 cents to $2.0974 a gallon. The September contract rose 3.63 cents to $2.1010 a gallon.

Brent crude settled up 31 cents at $77.59 a barrel on the ICE futures exchange.