LONDON (Reuters) - Oil rose toward $80 a barrel on Thursday after dropping to 2010 lows the previous day as expectations for rising demand growth in the world's top energy consumer the United States shored up prices.
U.S. economic activity is now at a low level but is showing signs of modest improvement, the Federal Reserve said on Wednesday, in remarks seen as reinforcing the prevailing view that oil demand will grow in 2010.
U.S. crude for February rose 11 cents to $79.76 a barrel by 1145 GMT, after touching a 2010 low of $78.37 on Wednesday. ICE Brent crude for February gafell one cent to $78.30 a barrel ahead of its expiry later today.
"Sentiment is positive. The driver still remains the pick-up in the macroeconomic outlook and people will be looking for wider signs of recovery," said oil analyst Amrita Sen at Barclays Capital.
Oil prices rallied to 15-month highs of nearly $84 a barrel earlier this week as freezing weather across much of the northern hemisphere boosted heating demand. Prices then fell partly on the back of surprise jumps in U.S. distillate stocks, including heating oil, and a rise in crude oil inventories.
U.S. crude oil stocks rose by a larger-than-expected 3.7 million barrels last week, Energy Information Administration data showed on Wednesday. And while heating oil stocks fell by 1.1 million barrels, stocks for the broader category known as distillates rose by 1.4 million barrels.
Some traders chose to take advantage of Wednesday's price dip by covering short positions and this also helped to boost prices back to near $80 a barrel on Thursday, analysts said.
"Prices are moving in a $75-$85 range. It was very good timing to buy back the market," said Ken Hasegawa, a commodity derivatives manager at brokerage Newedge in Japan.
WEATHER RISK
Oil stockpiles both on land and floating tankers have bulged over the past 18 months as the economic crisis cut energy demand but the recent bout of cold weather has drawn down stocks.
Although Wednesday's U.S. stock draws were less than expected, analysts said cold weather jitters could still have a role in supporting prices near $80 a barrel.
"It's still winter and this is still a supporting factor as weather is a wild card," said Sen.
Forecasts now show higher-than-normal temperatures in the U.S. Northeast over the coming week, signaling that heating fuel demand will remain lower than normal. However, unseasonably cold weather conditions in Europe will keep heating oil demand "above average" levels, forecaster Meteorlogix said on Thursday.
Investors will later on Thursday also look to wider economic data for further signs that demand is recovering.
U.S. retail sales for December and U.S. weekly jobless claims are due at 1330 GMT.
Later on Thursday, the top U.S. futures regulator will unveil long-awaited proposals aimed at barring manipulators from high-flying energy markets, but the agency is expected to tread lightly with its new regulations, at least initially.
The Commodity Futures Trading Commission is expected to make a decision on whether to adopt a proposed rule on position limits in energy markets at 1800 GMT.
The European Union's nominee for chief financial watchdog said on Wednesday that speculation in commodity derivatives has been "scandalous" and needs to be regulated carefully.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by James Jukwey)
