But a downward revision by the US government on its oil demand forecasts and doubts over the effectiveness of the US government's bank rescue plan capped oil's gains.

US crude for March delivery rose 38 cents to $37.93 a barrel by 0225 GMT, after settling down $2.01, or 5 per cent, at $37.55 a barrel on Tuesday.

London Brent crude rose 50 cents to $45.11, stretching its unusual premium over US oil prices to more than $7 a barrel, nearing the record above $9 hit last month as storage tanks in the Cushing delivery point neared their peaks.

"The API data is helping prices to rebound after last night's sell-off. Oil prices were perhaps a little oversold amid the panic across the equities and commodities markets," said Toby Hassall, chief analyst at Commodities Warrants Australia.

"The macroeconomic data from the US is not painting a picture of swift recovery but the API numbers could be an indication that supply and demand in the spot market is beginning to get a little more balanced."

US crude oil stockpiles unexpectedly fell 1.996 million barrels last week despite an increase in import levels and a decline from refineries, data from the American Petroleum Institute on Tuesday, bucking expectations that crude stocks would increase by 3.1 million barrels.

Analysts said investors were cautiously optimistic as the API report comes one day ahead of the US Energy Information Administration's (EIA) weekly report on petroleum supply and demand, which is considered to be accurate.

US crude oil inventories rose for the seventh consecutive time last week, analysts forecast in a Reuters poll on Tuesday, citing a drop in refinery utilisation and higher imports.

In yet another sign that OPEC would cut production targets at its next meeting in March, Saudi Arabia's oil minister said low oil prices were as unjustified and unsustainable as the record peak above $147 a barrel last summer.

But expectations that the International Energy Agency will cut its forecasts for 2009 world energy demand yet again this week due to a worsening economic outlook continued to weigh on oil markets.

Oil's sharp losses on Tuesday, which dragged it back below the psychologically important $40 mark, came after the US government revised its oil demand forecasts lower and on concerns the American banks bailout plan unveiled by the Obama administration will do little to revive the ailing economy.

The EIA revised down its 2009 global oil demand forecast by 400,000 barrels per day from the previous outlook, predicting demand will fall by 1.17 million bpd this year from 2008 levels.