Oil rose above $40 a barrel on Wednesday, extending a 4 percent rally in the previous session, lifted by firmer equities before the release of U.S. inventory data expected to show rising supply.

World stocks rose on Wednesday after Federal Reserve Chairman Ben Bernanke signaled nationalization of big banks was not at hand. Investors' concern of nationalization had weighed on stocks.

The equities rally is supporting the market, said Tony Machacek, a broker at Bache Commodities Ltd.

U.S. crude was up 50 cents to $40.46 by 6:39 a.m. EST. Brent, trading at an atypical premium to U.S. crude because high U.S. inventories are weighing on the U.S. benchmark, was up 20 cents to $42.70.

Oil has fallen from a record high near $150 reached last year, hit by the recession and weakening global fuel demand which forecasters such as the International Energy Agency predict will contract in 2009.

The price of oil has become closely intertwined with equities, a barometer of economic sentiment, in recent months. European stocks <.FTEU3> were up more than 1 percent on Wednesday, following gains in Asia.

President Barack Obama, in a speech to Congress, sought to strike a balance between hope and reality on Tuesday to reassure Americans mired in economic crisis that they would survive a day of reckoning.

Attention will focus later in the session on the latest snapshot of oil supplies in the United States.

The U.S. Energy Information Administration releases its weekly inventory report at 10:30 a.m. EST, which is expected to show that crude stocks probably rose 1.4 million barrels last week.

American Petroleum Institute data on Tuesday showed crude stocks rose 341,000 barrels last week. Oil traders consider the EIA data gives a fuller picture because energy firms are required to respond to its weekly survey.

Also supporting oil were figures earlier this week showing higher-than-expected compliance by the Organization of the Petroleum Exporting Countries to agreed production cuts.

OPEC oil ministers meet to set policy on March 15, and the group is expected to consider deepening its output cuts.

(Additional reporting by Annika Breidthardt in Singapore; Editing by James Jukwey)