Oil prices rise as traders mull demand prospects

Oil prices rose after the Fed's announcement on Tuesday that it would hold interest rates low for the next two years. Still, oil prices are down about $18 a barrel since July 22.

Oil prices rose Wednesday as traders weighed the prospects for stronger global demand against the backdrop of sluggish U.S. and European economies.

Benchmark West Texas Intermediate crude rose $1.75, or 2.2 percent, to $81.04 a barrel in afternoon trading on the New York Mercantile Exchange. Oil is down about $18 a barrel since July 22.

Brent crude gained $2.66, or 2.6 percent, to $105.23 per barrel on the ICE Futures exchange in London.

Oil found some support from the Federal Reserve's decision on Tuesday to keep interest rates low until at least 2013. That could prompt more investors to put their money into commodities like oil while the U.S. economy is in low gear.

The International Energy Agency on Wednesday followed OPEC's lead in trimming its outlook for how much global oil demand will grow this year. At the same time, IEA raised its forecast for 2012. OPEC said Tuesday that demand for oil will grow at a slower pace this year than it previously thought.

Most experts agree however that global consumption of oil will increase this year and next year, and most of the demand will come from China and other regions outside the U.S. and Europe.

A new report from Barclays Capital shows China's oil demand rose 7.4 percent in July from the previous year despite government measures to slow the booming economy and curb inflation. China is the world's second largest oil consumer behind the U.S.

The Energy Department said U.S. crude oil supplies fell last week by 5.2 million barrels, or 1.5 percent, to 349.8 million barrels. Gasoline supplies shrank by 1.5 million barrels, although wholesale demand for gas over the four-week period that ended Aug. 5 was 3.4 percent lower than a year earlier.

Traders are worried about slower economic growth in the U.S. and debt problems in Europe that could affect demand for oil, gasoline and other energy products. Many take their cues from stock markets, which often can shed light on the pace of the economy around the world, analysts said.

The volatility in those markets over the past few weeks has heightened concerns that the U.S. could slide back into a recession, Tradition Energy analyst Gene McGillian said.

"Going forward, I think we're going to be watching to see how the economics are going to play out to suggest whether or not some of the earlier, say more rosier, scenarios about the end of 2011 and 2012 are really going to prove to be accurate," he said.

"The current fundamentals do not look alarming enough to start pricing in a double-dip recession," Barclays Capital analysts wrote in a note to clients.

Andrew Lebow, MF Global senior vice president, said he expects oil prices to swing from gains to losses until there is more stability in the stock markets.

In other Nymex trading in September contracts, heating oil rose 6 cents to $2.8285 a gallon, gasoline gained 8 cents at $2.7431 a gallon and natural gas added 2 cents at $4.017 per 1,000 cubic feet.