LONDON- Oil prices rose to their highest since early March on Wednesday on data showing a big drop in U.S. crude inventories, and a weak dollar, but mounting coronavirus infections weighed on the demand outlook.

Brent crude was up $1.63, or 3.67%, at $46.06 a barrel by 1215 GMT, while West Texas Intermediate oil rose $1.59, or 3.81%, to $43.79 a barrel. Both contracts gained over 4% earlier in the session.

U.S. crude inventories fell by 8.6 million barrels in the week to Aug. 1 to 520 million barrels, compared with analysts' expectations for a 3 million barrel drop, the American Petroleum Institute found.

Official figures are due on Wednesday.

A weaker dollar .DXY , which makes oil cheaper for holders of foreign currencies, also supported prices.

"There's no escaping the benefits of a weaker dollar in the commodity space and oil is certainly basking in its decline," senior OANDA analyst Craig Erlam said.

Sentiment also drew support from signs that talks between Democrats in Congress and the White House on a new coronavirus relief package are making progress, although the sides remain far apart. 

U.S. factory data this week also showed an improvement in orders, which some analysts took as a hint of economic recovery. 

Euro zone business activity returned to modest growth in July as some curbs imposed to stop the spread of the coronavirus eased, the Composite Purchasing Managers' Index from IHS Markit showed on Wednesday. 

Rising prices come against the backdrop of a surge in coronavirus cases which could threaten a recovery in fuel demand.

Global coronavirus deaths surpassed 700,000 on Wednesday, according to a Reuters tally, with the United States, Brazil, India and Mexico leading the rise in fatalities. 

"We see gasoline demand coming in close to 7% year-on-year lower through Q3, with gasoil/diesel registering a decline of some 4%, implying a continued slowdown of the recovery, with a global return to 2019 levels this year increasingly in doubt," JBC Energy said.

The consultancy sees jet fuel demand down 50% year on year lower through the third quarter.

(Additional reporting by Aaron Sheldrick in Tokyo; editing by David Evans and Jason Neely) ((Ahmad.Ghaddar@thomsonreuters.com; +442075424435; Reuters Messaging: ahmad.ghaddar.thomsonreuters.com@reuters.net))