Oil climbed above $88 a barrel, recovering from six-week lows hit earlier in the session as receding geopolitical concerns and a rise in US oil product stocks outweighed OPEC's decision not to increase output.
Healthy inventory levels were among reasons cited by OPEC to keep output levels unchanged during the peak winter demand season and analysts said the recent drop in oil prices also reflected a firming US dollar, the currency used to price crude.
US crude futures was 70 cents up at $88.19 a barrel by 1530 GMT after dipping as low as $85.82 earlier in the session, a level not seen since October 24. It settled down 83 cents at $87.49. London Brent crude was 28 cents up at $88.77 a barrel.
Oil's turnaround came as US dollar weakened against the euro after the European Central Bank's President Jean Claude Trichet said some governors at the bank would have supported a rate increase.
The ECB left interest rates unchanged today, while the Bank of England cut its rates by 25 basis points.
US oil prices have fallen more than 12 percent below the all-time peak of $99.29 hit on Nov. 21. Oil has been falling since late November, which has clipped a rally of more than 40 percent since August that put crude close to $100 a barrel.
Oil initially surged more than $2 on Wednesday after the Organization of the Petroleum Exporting Countries, which supplies more than a third of world's oil, rebuffed calls from consumer nations to pump more by agreeing to keep output steady.
This bullish news was followed by more - a drop in US crude stockpiles last week, which plunged by a hefty eight million barrels to their lowest level in more than two years. However, stocks of distillate fuels, which include diesel, rose by 1.4 million barrels against predictions of a decline of 300,000 barrels and gasoline inventories rose 4 million barrels, topping analysts' forecasts for an increase of 900,000 barrels.
"The builds in... product inventories certainly played a role in dampening crude oil's response, but we would say that crude oil's failure to rally on clearly bullish news helps confirm that this is now a bear market," analysts at Citigroup noted.
Analysts said the market was probably concluding that there will be enough oil to swing the supply picture towards a more comfortable balance in early 2008, while demand could take a knock from a recession in top consumer the United States.
A report earlier this week that grouped the findings of various US intelligence agencies and contradicted the Bush administration's assertion that Tehran was intent on developing an atomic bomb has also dampened oil by reducing the so-called Iran risk premium in the price.