Oil rose towards $124 a barrel this morning, rebounding from a seven-week low, in what analysts said was technical buying and short-covering after recent declines left the market oversold.
But analysts said worries of slowing fuel demand, which have dragged crude prices down from their record peak of over $147 a barrel on July 11th, continued to loom over the market.
US light crude for September delivery rose 46 cents to $123.72 a barrel by 0228 GMT. The contract fell $2.23 on Friday to settle at $123.26, after falling to as low as $122.50, the lowest since June 5th. London Brent crude rose 18 cents to to $124.70.
"I think it's just a technical bounce. The decline in prices has probably triggered some stop-loss orders so that has lifted prices slightly," said Gerard Burg, an analyst at the National Australian Bank in Melbourne.
Oil has fallen over $23, or about 16 per cent, in the past two weeks on concerns that high fuel prices were battering demand, after recent reports showed fuel consumption in the United States and other industrialised nations had begun to slide.
Data from the Commodity Futures Trading Commission released on Friday also showed that speculative funds were shifting to a net short position for the first time in 17 months.
Mark Pervan, a senior commodities analyst at the Australian & New Zealand (ANZ) Bank, said expectations that Opec's oil output would rise this month, amid slowing demand, were weighing on sentiment.
Opec's oil output is expected to rise by 200,000 barrels per day in July from June because of higher supplies from Saudi Arabia and Iraq, industry consultant Petrologistics said on Friday.
Still, geopolitical concerns in the Middle East and rebel threats against oil installations in Opec member Nigeria were expected to keep a floor under oil prices, analysts said.
Iran has more than 5,000 active centrifuges for enriching uranium, its president was quoted as saying on Saturday, suggesting a rapid expansion of nuclear work the West suspects is aimed at making bombs.
President Mahmoud Ahmadinejad's announcement was likely to annoy major powers which have offered Iran a package of economic and other incentives to persuade Tehran to suspend its enrichment activities.
In Nigeria, gunmen released eight foreign oil workers seized from a vessel off the Niger Delta on Saturday but eight other people abducted in separate incidents were still being held, security officials said.
Rising demand in emerging economies such as China launched oil on a six-year rally that sent prices up seven-fold at their peak. The sharp drop has some analysts forecasting oil prices may have peaked, with Lehman Brothers predicting $90 a barrel by the end of the first quarter of 2009.
Reuters