Oil reversed early losses on Wednesday rising toward $71 a barrel on equity markets, after falling to the lowest in August so far due to concerns about the strength of demand ahead of weekly U.S. inventory data.
U.S. light crude for September delivery rose $1.39 to $70.84 a barrel by 1358 GMT (9:58 a.m. EDT), having fallen for the previous four sessions. U.S. crude hit a near two-week low of $68.84 in early trade Wednesday, before rebounding strongly.
London Brent crude fell 20 cents to $72.26.
Traders said oil prices continue to track the fortunes of equity markets as they look for positive signs from the wider economy. Global stock markets were broadly up Wednesday, but oil fundamentals have given some cause for concern.
World oil demand growth will be lower in 2010 than previously forecast, the International Energy Agency (IEA) said in its monthly market report Wednesday, with little evidence a global recovery is underway yet.
The Paris-based agency, adviser to 28 industrialised nations, said global oil demand was now seen recovering by just 1.3 million barrels per day (bpd) in 2010, having fallen by 2.3 million bpd this year as the economic crisis curbed consumption. World oil demand hit a peak of 86.5 million bpd in 2007.
Evidence of a bottoming out of the recession is still a bit patchy. The latest data on industrial production for some of the larger countries remains negative, David Martin, analyst at the IEA, told Reuters.
There is not clear evidence yet we have seen the worst.
Falling demand for oil has seen inventories of crude and oil products stack up around the world.
Combined with the impact of a tame U.S. summer driving season, the drawdown in stocks typical of this time of year has not happened. The IEA said stocks in developed countries stood at almost 62 days of forward cover at the end of June.
Tuesday, weekly stocks data from the American Petroleum Institute (API) showed an unexpected fall of 1.4 million barrels in crude stocks.
The U.S. Department of Energy, will release its own weekly snapshot of U.S. fuel inventories at 1430 GMT (10:30 a.m. EDT).
Data from the DoE and API can diverge widely.
An expanded Reuters poll of analysts Tuesday showed expectations of a 700,000-barrel rise in crude stocks, a 1.3-million-barrel decrease in gasoline stocks and a 200,000-barrel drop in distillates stocks.
Traders will also keep a close eye on the two-day U.S. Federal Reserve meeting that ends later Wednesday with a statement expected at about 1815 GMT (2:15 p.m. EDT).
The Fed and their statement will be the biggest factor that will drive the future of oil prices, said Phil Flynn, energy analyst at PFGBest Research.
The statement from the Federal Reserve could influence the direction of the dollar, which tends to have an impact on commodities like oil which are priced in the greenback.
The dollar was lower ahead of the meeting, making oil cheaper for holders of other currencies.
(Additional reporting by Maryelle Demongeot in Singapore; Editing by Sue Thomas)