Brent crude edged up slightly on Wednesday while U.S. crude rose $1 in light trading as an unexpected drop in U.S. stockpiles outweighed a pledge by top OPEC exporter Saudi Arabia to meet any supply shortfall.
Crude stockpiles in the world's top oil consumer dropped by 1.2 million barrels last week, according to data from the U.S. Energy Information Administration, confounding forecasts for a build in inventories and giving oil futures a lift in early Wednesday trading. Gasoline and distillate stockpiles also fell.
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The gains came one day after Saudi Arabian Oil Minister Ali al-Naimi said fundamentals do not support current prices, and pledged to make up for any potential supply shortfalls in a bid to soothe market concerns about a potential supply disruption from Iran.
"Crude futures are up on the EIA inventory draw downs but prices are also moving up because yesterday's sell-off appears to have been overdone," Phil Flynn, analyst at PFGBest Research in Chicago, said.
Worries the standoff between the West and Iran over Tehran's nuclear program could hit supplies have lifted oil prices by 15 percent this year.
On Wednesday, Brent crude for May delivery rose 8 cents to settle at $124.20 a barrel. U.S. crude futures settled $1.20 higher at $107.27 a barrel, after sliding more than $2 on Tuesday.
Trading volumes for both contracts were light, nearly 40 percent below the 30-day moving average in late afternoon activity.
Analysts said the market is now balancing the Saudi assurances against the potential risk for the loss of oil from Iran, which is facing U.S. and EU sanctions in a bid to force Tehran to halt its nuclear program.
"There is a battle going on between the bulls who think that crude could push above $110 and people who think that supply-and-demand fundamentals don't justify oil being above $100," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
Saudi Arabia's Naimi argued that supply was outstripping demand by 1 million barrels per day, and added the OPEC kingpin pumping 9.9 million bpd -- the most in decades -- supplying every customer request and could reach its maximum capacity of 12.5 million bpd immediately if needed.
High oil and gasoline prices have become a focal point of the presidential race in the United States, with the White House reiterating on Tuesday it plans to expedite the construction of the southern leg of TransCanada's proposed Keystone XL pipeline.
"The president will reiterate his administration's commitment to expediting the construction of a pipeline from Cushing, Oklahoma to the Gulf of Mexico, relieving a bottleneck of oil and bringing domestic resources to market," a White House official said ahead of a two-day, four state trip by Obama to promote his energy policies.
The southern leg of the project would help ease a glut of crude in the Midwest and ship it to the Gulf Coast refining center. The larger Keystone XL pipeline project, which would deliver Canadian crude directly to the Gulf Coast and deeply opposed by environmental groups, was blocked earlier this year.
TransCanada said it wants the $2.3 billion southern leg in service by mid- to late 2013. It has told the State Department it intends to refile its application for the northern section,and believes that given all the preparatory work that it has already done it could have an approval decision by the first part of next year. Assuming it is aproved, it could be in operation in 2015.