Oil climbed back above $70 a barrel on Wednesday as an industry inventory report showing a larger-than-expected fall in U.S. crude stocks buoyed hopes of a demand recovery and encouraged buying.

The American Petroleum Institute said that domestic crude stocks fell 6.8 million barrels to 349.7 million barrels last week, against analysts forecast for a much smaller drawdown of just 2 million barrels.

This helped turn crude around from a 2 percent overnight loss, after a drop in U.S. consumer confidence added to concerns about a potential economic rebound.

U.S. crude for August delivery rose 59 cents to $70.48 a barrel by 0636 GMT (2:36 a.m. EDT). The contract settled down $1.60 at $69.89 a barrel on Tuesday, after earlier rising to an eight-month high of $73.38.

London Brent crude rose 62 cents to $69.92 a barrel.

The U.S. consumer confidence report was a negative for the oil price but in late news, reports by the American Petroleum Institute that crude stocks fell by 6.8 million barrels helped to lift sentiment, said David Moore, a commodities analyst at the Commonwealth Bank of Australia.

The API report is regarded as a precursor to more authoritative numbers issued by the U.S. Energy Information Administration at 10:30 a.m. EDT on Wednesday.

Data from South Korea and from China, the world's No.2 energy consumer, also offered some encouragement.

China's official purchasing managers' index (PMI) for June rose to 53.2 from 53.1 in May, showing that the country's economic recovery is on more solid ground, while South Korea's export numbers were much better than forecast.

Oil prices, which have tumbled from a record high of over $147 struck in July last year, have rallied in recent months on a weak dollar and hopes of a global economic recovery to chalk up a 42 percent gain in the last quarter -- the highest quarterly gain since 1990.

But some analysts have questioned the sustainability of the current prices as near term demand remains weak and the global economic outlook was still murky, a view backed up by Japanese business sentiment that improved less than expected in June.

U.S. unemployment and housing data, due later on Wednesday, will give the next clues on how the world's economies are faring.

(Reporting by Fayen Wong; Editing by Michael Urquhart)