Oil rose above $68 a barrel on Wednesday, after a 3 percent drop in the previous session, as data showing a fall in U.S. crude stocks raised expectations of demand growth in the world's biggest energy consumer.

The U.S. Energy Information Administration (EIA) will release weekly crude inventory data at 1430 GMT (10:30 a.m. EDT) as the market looks for confirmation of Tuesday's bullish report from the American Petroleum Institute (API).

U.S. crude for October delivery was up 42 cents at $68.47 a barrel by 5:52 a.m. EDT, after touching a two-week low of $67.85 earlier on Wednesday and falling nearly 3 percent to settle on Tuesday at $68.05. London Brent crude rose 40 cents to $68.13 a barrel.

I think oil was supported after the API report, which showed a surprisingly large drawdown in inventories, so some may bet on a similar outcome in the EIA data, said Carsten Fritsch, oil analyst at Commerzbank.

However, Fritsch warned that there were no guarantees Wednesday's data would match the API numbers.

The correlation between the two (reports) hasn't been that great in the last month so I'm not overly optimistic.

WEAKER STOCK MARKETS

Weaker global stock markets limited oil's gains on Wednesday after an overnight sell off on Wall Street, with both Asia and Europe rattled by concerns over the sustainability of this year's equity rally.

Japan's Nikkei average sank 2.5 percent on Wednesday, with exporters hurt by a stronger yen and sentiment dented by uncertainty over the U.S. financial sector's health.

Oil prices rose after API data showed that U.S. crude stocks fell 3.2 million barrels in the week to August 28, a larger drop than the forecast of a 600,000-barrel drawdown.

Less supportive news for oil prices came from China, where crude stocks climbed to near-record highs at the end of July, an industry newsletter reported, as crude imports outpaced the record amount of crude refiners processed.

Economic data due later -- August unemployment figures at 8:15 a.m. EDT and July factory orders at 10 a.m. EDT, both which are expected to be positive -- could underscore the U.S. economy's gradual pace of recovery and offer more trading cues.

Economists polled by Reuters expect 250,000 job losses in August, down from 371,000 in July. Factory orders are expected to rise 2.2 percent in July, versus a 0.4 percent gain in June.

The Organization of the Petroleum Exporting Countries is likely to leave output targets unchanged when it next meets on September 9 in Vienna.

Adding to already high inventories, OPEC has reduced its compliance with agreed production curbs, a Reuters survey on Tuesday found.

OPEC supply in August rose for a fourth consecutive month as Saudi Arabia, Nigeria and Venezuela increased their production, taking overall output discipline to 68 percent of the target from a revised 70 percent in July.

Russian oil output hit a record high in August, nearing 10 million barrels per day as the country launched a new giant field, while gas production recovered from its lows on improved demand.

August oil output rose to 9.97 million barrels per day, up 0.6 percent from 9.91 million bpd in July and 1.5 percent higher than 9.82 million bpd in August 2008.

(Editing by Anthony Barker)

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