Oil rebounded by about $1 on Thursday as investors focused on strong demand growth in Asia after a sell-off the previous day triggered by a surprise increase in U.S. gasoline stockpiles.
Brent crude for June gained $1.02 to $113.59 a barrel by 0504 GMT, partly reversing a 4 percent drop on Wednesday when official data showed the first increase in U.S. gasoline inventories in 12 weeks, triggering a slump across fuel markets that shaved more than $5 from front-month Brent. U.S. crude advanced $1.06 to $99.26.
In the United States they are more concerned about the unexpected rise in gasoline inventories and the sputtering economic recovery, said Gordon Kwan, head of energy research at Mirae Assets Securities in Hong Kong.
But over in Asia we have a more bullish view. Even if we see weakening in Chinese industrial output, it is still very strong and we don't believe in a hard landing.
Inflation has peaked, so we believe tightening policies will be done by the end of the third quarter. Oil demand will remain elevated in the run-up to the winter.
Implied oil demand in China, the world's second-largest crude consumer, reached its third-highest level on record last month, but year-on-year growth slipped to 8.8 percent after six consecutive months of double-digit gains.
At the current pace, China has surpassed a growth rate of 5 percent to 7 percent in oil consumption suggested in a Reuters poll earlier this year.
Signs that China's economy is cooling on Wednesday prompted some investors to sell. Still, the expected phasing out of monetary tightening measures could lead to sustained energy demand growth in the world's second-largest economy.
China's consumer inflation eased modestly to 5.3 percent in April from a 32-month high of 5.4 percent in March, underlining the view that price pressures are peaking and may start to ease in the second half of 2011.
A gradual slowdown is much better news for China than overheating, which would require more drastic action, said J.P. Morgan analysts led by Lawrence Eagles.
China has a lot of tools to reverse a steeper than expected slowing of the economy should it materialize. There does appear to be room to increase oil imports in the months ahead.
Brent crude is up 20 percent this year, having jumped to a 32-month high above $127 last month and easing back to as low as $105.15 on May 6. Eleven straight weeks of decline in U.S. gasoline stockpiles in the run-up to peak summer consumption were among the factors that recently supported prices.
But inventories last week rose by 1.28 million barrels as demand for the motor fuel fell in the past four weeks by 2.4 percent on average from the same period in 2010.
While gasoline led the market lower on Wednesday, with benchmark U.S. futures down by almost 8 percent, the most since September 2008, U.S. crude stockpiles jumped by 3.8 million barrels last week to more than 370 million barrels, a two-year peak.
The abrupt tumble in prices drove oil volatility <.OVX> to its highest close since mid-March as prices posted their second rout in less than a week. Wednesday's drop could prove another blow to commodity hedge funds, after last week's oil drop spurred double digit losses to big name funds such as Astenbeck and BlueGold.
Benchmark gasoline futures on Thursday gained 4.71 cents to almost $3.17 a gallon. Wednesday's plunge triggered a five-minute halt in trading of New York Mercantile Exchange crude and refined products.
The CME Group, owner of NYMEX, raised margins for RBOB gasoline futures by 21.4 percent to $8,500 per contract from $7,000 effective after the close of business on Thursday.
(Editing by Michael Urquhart)