Oil edged up toward $42 on Wednesday, after surging nearly 4 percent overnight, on a brightening outlook for China's economy and in anticipation that producer group OPEC would cut supply further at its next meeting.
China's gauge of the health of its manufacturing sector, the purchasing managers' index (PMI), rose smartly in February and gained for the third month in a row, suggesting the country may be on the brink of an economic recovery.
Weekly inventory figures from the U.S. Energy Information Administration (EIA) due later in the day, which will likely show rising crude stockpiles, could signal further weakness in demand from the world's top energy consumer. Markets will also watch February non-farm payrolls and unemployment data due on Friday.
U.S. crude was up 11 cents at $41.76 a barrel by 0737 GMT (2:37 a.m. EST), after rising $1.50 overnight, while London Brent crude fell 11 cents to $43.59 a barrel.
The market still lacks direction at the moment. Investors do not know what to focus on, given falling stock markets and the really bad economic outlook, said Ken Haseagawa, manager of commodity derivatives sales at Tokyo-based broker NewEdge.
There's been no sign of any decrease in U.S. crude inventories yet, so investors lack the confidence to take long positions.
Oil prices have mostly traded in a tight band on both sides of $40 since mid-December, trapped by demand worries and concerns producers might intervene to support prices.
U.S. stocks fell in volatile trading on Tuesday, with the S&P ending below 700 for the first time since October 1996, on uncertainty over funding to shore up the financial system. <.N>
Global energy demand has collapsed as the deepening financial crisis threw major economies into a recession, causing oil prices to tumble nearly $110 since their peak last July
In fundamentals news, Libya's top OPEC official, Shokri Ghanem, said markets were still oversupplied, and the exporter group needed to reduce output, either through better compliance with existing supply curbs or a new cutback. But OPEC President Jose Botelho de Vasconcelos said the cartel had yet to decide whether to cut output further when it meets.
U.S. crude oil stockpiles dipped 463,000 barrels last week amid lower import levels and higher demand from refiners, the industry group American Petroleum Institute said on Tuesday.
The EIA will release its inventory report for last week later on Wednesday, and crude oil supplies are forecast to have risen 1.2 million barrels, according to a Reuters poll.
The market will also eye the release of key U.S. economic data, including the ADP employment report for February at 1315 GMT (8:15 a.m. EST), and February non-farm payrolls data on Friday, both of which are expected to reflect rising unemployment in the economy.
We expect oil to trade in the $35-$45 range, Hasegawa said. If we see a continued increase in U.S. crude stocks, oil could break below $35, but at that level, we would see some buying interest emerging.
(Editing by Ben Tan)