Brent crude rebounded to above $122 on Wednesday, halting a two-day decline, on fears that the Libya conflict could settle into a bloody stalemate, while a sudden disruption in Kuwaiti oil exports boosted sentiment.
The market shrugged off concerns raised by the IEA and IMF earlier this week that high oil prices are beginning to dent oil demand, as well as a Goldman Sachs forecast that Brent prices would decline sharply.
ICE Brent crude for May rose $1.22 to $122.14 a barrel by 0642 GMT after hitting a high of $122.19. U.S. crude for May delivery reversed earlier losses, and climbed 66 cents to $106.91 a barrel.
The NYMEX contract's earlier 5.8 percent drop from Friday was the biggest two-day percentage loss since May 2010.
The market is still feeling bullish as there were some disruptions to oil supplies from Kuwait, said Serene Lim, an analyst with ANZ. Traders could also be buying on dips.
OPEC member Kuwait has temporarily halted oil export operations due to bad weather, a spokesman for the oil sector said on Wednesday.
Oil also remained supported by unrest in the Middle East and Africa as pro-democracy protests flared up across the region while Libya is in a stalemate after an African Union-sponsored peace plan collapsed this week.
With the Middle East and North Africa crisis, there is at least a 20 percent premium built in oil prices, Ben Le Brun, Sydney-based analyst at CMC Markets said.
Foreign ministers meet in Qatar on Wednesday for talks on Libya's future.
Several key forecasters, including the International Monetary Fund, the International Energy Agency and OPEC, raised fears global fuel demand is ebbing as consumers shunned expensive oil.
Top oil exporter Saudi Arabia has also quietly cut production on weaker demand, two Saudi-based industry sources told Reuters.
There have been plenty of negative factors for oil in the last 48 hours, Ben Le Brun, Sydney-based analyst at CMC Markets said, referring to the weak forecasts and a worsening of the Japan nuclear situation.
It's probably not a bad thing as inflation is the biggest buzzword around the market.
High prices are beginning to dent oil demand growth and could slow the rapid pace of global economic growth, the International Energy Agency, an energy policy adviser to Western consuming nations, said.
Many traders booked profit after Goldman Sachs
Goldman expects Brent to fall toward $105 in coming months, the bank said in a note emailed to clients, after recommending on Monday that they close its trade on a basket of commodities that included U.S. crude.
GASOLINE STOCKS DOWN
A larger-than-expected drop in gasoline stocks in the United States last week ahead of the peak driving season also lifted sentiment.
Gasoline-related factors should drive oil prices (in the near term), Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments said.
Gasoline and distillates stocks fell more than expected as refinery use slumped, data from the American Petroleum Institute industry group showed late on Tuesday.
U.S. crude inventories rose 1.2 million barrels in the week to April 8, compared with analysts' expectations for a 1 million barrel build in a Reuters poll.
The U.S. Energy Information Administration's inventory report is due on Wednesday at 1430 GMT.
BRENT-WTI TO NARROW
J.P. Morgan analysts said Brent's premium against U.S. crude, also known as West Texas Intermediate (WTI), could narrow in the coming month as complex refineries return from seasonal maintenance, reducing light sweet crude demand.
It is important to reiterate that this would be a temporary shift, the analysts led by Lawrence Eagles said in an April 12 note. Once we get to the end of the third quarter, the Cushing bottleneck should once more re-emerge.
Technical charts showed Brent's premium to WTI crude is expected to narrow to $8 per barrel over the next four weeks, Reuters market analyst Wang Tao said.
(With additional reporting by Seng Li Peng; Editing by Ed Lane)