Oil rose above $40 a barrel on Monday, recovering from earlier losses, after sentiment was lifted by a report the U.S. government was in talks on increasing its stake in Citigroup.

Further evidence the Organization of the Petroleum Exporting Countries has strictly enforced output cuts also provided support, although persistent worries about the weakened global economy and its implications for oil demand limited gains.

U.S. front-month crude rose 53 cents to $40.56 by 8 a.m. EST, off a session low of $39.53. The contract ended 15 cents lower at $40.03 on Friday.

London Brent crude gained 75 cents to $42.64.

The banking crisis is still at the core of the broad recession, so if investors in general see this as a positive sign, it could be positive for oil as well, said Mike Wittner of Societe Generale.

A source familiar with the situation told Reuters talks were ongoing between Citigroup Inc and regulators that could increase the U.S. government's stake.

The Wall Street Journal on Monday reported the government could end up owning as much as 40 percent.

Equities traders had expected a full-scale nationalization and the report helped to boost shares in Asia and Europe.

As investors cut their safety trades, gold, a safe-haven investment, eased after topping $1,000 an ounce last week.


As the financial crisis has thrown major economies into recession, global energy consumption has shrunk, prompting oil prices to fall by more than $100 since last July's peak of nearly $150.

In response, OPEC has already agreed on cuts totaling 4.2 million barrels per day (bpd) since last September and evidence has mounted of a high level of compliance with the lower production targets.

In February, OPEC oil supply was expected to drop sharply, Petrologistics told Reuters on Monday.

OPEC's 11 members with output targets were expected to pump 25.32 million bpd in February, down 980,000 bpd from January levels and giving a compliance rate of 89 percent, according to Reuters calculations, which would be one of the highest rates yet.

It's provisional because we're still in February, said Wittner. But that's mighty constructive.

The producer group is also very likely to decide on a new production cut at its next meeting scheduled in March, Algerian Energy and Mines Minister Chakib Khelil said at the weekend.

Oil had fallen in response to worries about a deepening economic recession after comments last week by Paul Volcker, a top adviser to President Barack Obama, that the global economy might be deteriorating even faster than during the Great Depression.

Financial markets will be keeping an eye on Federal Reserve Chairman Ben Bernanke's policy report to the U.S. Congress on Tuesday and Wednesday. He is expected to offer assurances help is on the way for the U.S. economy and may offer clues on additional steps that could halt the economy's downward spiral.

(Additional reporting by Barbara Lewis in London and Fayen Wong in Perth; editing by James Jukwey)