Brent crude oil rose to around $109 a barrel on Wednesday on expectations of a fourth round of monetary stimulus from the U.S. Federal Reserve, although concerns about oversupply and weak demand limited gains.
Brent crude futures were up 99 cents to $109 a barrel by 1338 GMT, rebounding from last week's dip. U.S. crude was up 51 cents to $86.30 a barrel.
Analysts said riskier assets such as oil were getting a boost from market expectations that the U.S. Federal Reserve will unveil fresh stimulus measures later in the day.
But gains were being limited by the announcement that OPEC had agreed to hold its output target steady despite forecasts for a fall in demand in the first half of 2013.
Also weighing on oil was the fact that Iraq and Saudi Arabia were in dispute about which country would cut output to get nearer to the OPEC target and reduce surpluses.
"Any indication of conflict around making way for Iraqi oil will be seen as bearish for the oil price," said Gareth Lewis-Davies, senior energy strategist at BNP Paribas. "But it's not explaining the price move we are seeing today."
Instead, he pointed to the weaker dollar, which was down 0.16 percent against a basket of currencies at 1334 GMT. A weaker dollar makes commodities priced in dollars more affordable for holders of other currencies.
The dollar was under pressure as markets expected the Fed to expand its current asset purchase scheme and extend its purchases of mortgage-backed debt to help sustain the fragile U.S. economic recovery.
"The market has absolute confidence this will happen, and it will be extremely disappointing if it doesn't come," said Filip Petersson, a commodity strategist at SEB in Stockholm. "It's risk-on for this reason."
SLUGGISH DEMAND GROWTH
The picture was more bearish from a fundamental perspective, with the International Energy Agency (IEA) forecasting sluggish demand growth throughout 2013 and comfortable oil supply levels.
In its monthly report on Wednesday, the IEA forecast global oil demand growth for 2013 at 865,000 barrels per day, 110,000 bpd higher than in its previous report, taking consumption up to an average of 90.5 million bpd.
On the supply front, spectacular growth in U.S. production on the back of a boom in shale oil is seen as a key development in 2013.
Abundant supply was also a concern for some OPEC ministers at a meeting in Vienna, where Algeria's oil minister said OPEC was producing too much oil given weaker demand and high inventory levels.
OPEC's production declined in November closer to its output target of 30 million bpd, led by a cut in Saudi Arabian output. But Iraq said it would never cut production and that other countries should shoulder the burden of output cuts if needed.
"This issue of making way for Iraqi oil will be quite important over the next year or two," Lewis-Davies said. "Saudi Arabia will continue to adjust its production to get the oil price it needs, but the cutting back will need to be greater if Iraqi oil production steps up."
Saudi Arabia increased supply earlier in the year to replace a drop of 1 million bpd caused by Western sanctions against Iran over its disputed nuclear programme.
SEB's Petersson said OPEC output had to fall or there would be even more surplus oil in the market next year and prices would come under pressure.
"It looks like there are enough supplies to cope with any pick-up in demand," Ole Hansen, senior commodity strategist at Saxo Bank, said.
"We will start the year on a relatively weak note in many regions, so oil prices are likely to stay within the range they have established over the last few months."
The market is also looking to weekly U.S. crude oil and refined products inventory data, due from the Energy Information Administration later on Wednesday.
"There's a lot of focus on U.S. production, which continues to surprise," Hansen said. "Last week we had a big spike in gasoline stocks, and there have also been builds in distillates."
The U.S. winter is forecast to be one of the warmest on record, which has put heating oil and natural gas prices under downward pressure over the last few weeks.
A Reuters poll found that analysts expect U.S. crude oil stocks to have fallen over the week amid high refinery demand, while gasoline inventories are expected to show a rise.
Hansen said the market would remain range-bound for the time being and that prices had found support at $107 a barrel, encouraging day-traders to re-enter the market.
"That has created a base. If we can get a foothold at $108.40, it could try to make a pop to the upside, but I think it will run out of steam between $109 and $110," he said. (Additional reporting by Florence Tan in Singapore; editing by James Jukwey and Jane Baird)