Oil Creeps Up, Above $38, IEA Cuts Demand Forecast

U.S. crude rose 50 cents to $38.05 a barrel by 1019 GMT, just off a session high of $38.44.

Oil pared gains to hold just above $38 a barrel on Wednesday after the International Energy Agency said fuel demand would contract more sharply than previously thought.

Prices drew some support from U.S. data showing lower crude stocks and indications the Organization of the Petroleum Exporting Countries was determined to limit supply.

"The OPEC production cuts are beginning to feed through into a stabilisation and even some erosion of the high stock levels," said Christopher Bellew, broker at Bache Commodities in London.

U.S. crude rose 50 cents to $38.05 a barrel by 1019 GMT, just off a session high of $38.44.

London Brent crude rose 51 cents to $45.12, stretching its unusual premium to U.S. oil prices to around $7 a barrel.

A record supply glut in Cushing, Oklahoma, the delivery point for the U.S. contract, has weighed on U.S. crude.

But U.S. supplies have fallen in the past week, according to data from industry group the American Petroleum Institute released late on Tuesday.

The figures showed U.S. crude oil stockpiles unexpectedly fell by 1.996 million barrels.

SLOWING DEMAND

Even though supplies are lower, the weakness of demand was a key focus for the market.

In its latest monthly report on Wednesday, the Paris-based IEA said global oil demand was expected to fall by 980,000 barrels per day (bpd) in 2009, down from its previous forecast of a 500,000 bpd contraction.

It linked the revision to the extreme weakness of the global economy.

A slew of dismal economic data on Tuesday had dragged oil back below the psychologically important $40 mark.

Until recently, many analysts predicted the relative strength of the Chinese economy would help to sustain demand for oil even though consumption has fallen sharply in developed economies.

But on Wednesday, data from the General Administration of Customs showed January crude oil imports to China, the world's second-largest energy consumer after the United States, had fallen by 8 percent to the lowest level for 15 months.

The argument is that prices this low will limit investment and lead to a market surge when demand eventually recovers.

"If today's low prices continue long enough, they will sow the seeds for future price spikes and volatility," Saudi Oil Minister Ali al-Naimi said in Houston on Tuesday.