Oil prices rose on Tuesday following Monday's fall of nearly $3 in the face of rising US stockpiles and expected warmer winter weather. US crude futures rose 88 cents in morning trade to $42.20 a barrel, after Monday's more than 6 percent slump. London's International Petroleum Exchange was shut for a seasonal holiday.
Prices have slumped as a rise in US distillate inventories and weather forecasts calling for above-average temperatures eased anxiety about US winter fuel supply.
US domestic heating needs will be nearly 18 percent below normal in the coming week, with the heavy consuming New England area 7.7 percent below average, the US National Weather Service forecast on Monday.
The US National Weather Service's forecast for New York City called for temperatures to moderate and rise to near 50 degrees F (10 C) on Wednesday, with highs above 40 degrees (4 C) into next week.
The lower short-term outlook for oil demand has encouraged speculators to take profits from 2004's big rally in oil prices, which are still up 28 percent since the start of the year.
"Speculators do not like to have positions at the end of the year," said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo.
Big-money funds had moved back to the long side of the crude market as of a week ago, holding a very small net position of 1,638 lots, US data showed. They are likely to have gone short during the subsequent sell-off, dealers said.
Traders will now look to Wednesday's weekly US stockpile report to see whether low heating oil supplies will be sufficient to last the winter comfortably.
Distillate stocks, which include heating oil and diesel, are forecast to have dipped 720,000 barrels in the week to December 24 as cold weather spurred demand in the Northeast, a preliminary Reuters poll of eight analysts showed.
Analysts had also expected inventories to fall in the previous week, but they rose 700,000 barrels instead.
Crude tanks were seen sliding 200,000 barrels and gasoline stocks rising 240,000 barrels last week, the poll showed.
Unless winter fuel supplies make up some of their nearly 12 percent deficit versus last year, the market is likely to remain on edge well into the first quarter, which forecasters expected to be colder than usual.
Global crude production outages are also still sapping some 500,000 barrels per day (bpd), although a Nigerian community leader said on Monday that a protest shutting in 120,000 bpd of output could be resolved this week.
Iraq's oil exports ground to a halt on Tuesday as bad weather stopped Iraq's southern oil exports and northern flows remained at a standstill following sabotage attacks, shipping sources said.
In Asia, the death toll after Sunday's huge earthquake and devastating tsunami climbed to more than 50,000, but oil production, shipping and refining operations were unaffected.
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