Oil held steady around $67 a barrel on Tuesday after climbing more than 1 percent a day ago, boosted by strong equities markets and Iran's missile tests, but gains were moderated by expected builds in U.S. fuel stocks.
Asian shares, led by Japan's Nikkei average <.N225>, followed a U.S. stocks rally spurred by takeover news that pointed to an easing of risk aversion. Hopes for an economic recovery offered support to oil, gold and most base metals.
U.S. crude futures for November gained 3 cents to $66.87 a barrel by 0640 GMT (2:40 a.m. EDT), after closing up 82 cents on Monday. London Brent rose 4 cents to $65.58.
Crude will continue to move according to the stock markets and inversely to the dollar, which will remain weak, said Tony Nunan, risk manager at Mitsubishi Corp in Tokyo.
People have been a bit shaken by the big drop in oil prices last week -- back-to-back drops -- following a stable market which has been trading within a $10 range for the past couple of months, he added.
Prices slid more than $8 in the past two weeks to just above $65 on Friday, a near two-month low, on doubts over energy demand given weak U.S. economic data and high crude inventories.
The recovery this week has taken support from Iran test-firing a type of missile which a commander said could reach any regional target.
But analysts said short-term fundamentals remain weak, with U.S. crude and oil products stocks set to show sustained increases in the latest week and as refiners in the world's largest oil consumer prepare for maintenance ahead of winter.
The problem is that the oil market is now in a shoulder period of low demand before seasonal demand picks up in winter, said Nunan, though he added fund managers will continue to support the oil and commodities markets as mid-to-long term fundamentals look firm as the economy recovers.
U.S. STOCKBUILD SEEN
A Reuters poll showed that U.S. crude stockpiles rose 500,000 barrels in the week to September 25, following an unexpectedly hefty build the week before.
Distillate inventories, which include heating oil and diesel fuel, and gasoline supplies were forecast to have risen 1.1 million barrels each, the poll found.
Weekly U.S. crude inventory data is due later on Tuesday from the American Petroleum Institute and Wednesday from the Energy Information Administration.
The recent global crude price fall is prompting China to plan cuts in retail fuel prices on Wednesday or Thursday, two sources close to the matter said, by an estimated 3 percent in its third reduction this year.
This will come after China on September 2 raised gasoline and diesel prices by 4-5 percent to near records, the fourth hike this year.
The head of the International Energy Agency (IEA) said crude oil demand has yet to recover substantially from the economic crisis, adding to the picture of weak demand.
This view was reflected by the CEO of Saudi Aramco, who did not expect to see a swift rebound in global oil demand.
Oil demand in the United States and Europe remains weak but the economic crisis will not lead to a permanent reduction in global consumption, Khalid Al-Falih, the head of Saudi Arabia's state oil firm, told a U.S. television station.
It will take time to make up for the millions of barrels of lost demand that we have experienced, he said.
(Editing by Michael Urquhart)