Oil up above $79 on fuel stocks drop, econ recovery

Oil edged up above $79 on Wednesday, as falls in U.S. fuel stocks during a cold winter and optimism over the global economy, countered a surprise rise in crude inventories and the firm dollar.

Crude stocks in the world's biggest oil consumer rose by 1.7 million barrels last week, against expectations of a 2.0 million-barrel drawdown, data from industry group American Petroleum Institute (API) showed.

U.S. crude for February delivery rose 24 cents to $79.11 a barrel by 0742 GMT in thin pre-holiday trade, after settling 10 cents up on Tuesday. London Brent crude for February rose 30 cents at $77.94.

Oil has rallied 13 percent over the past two weeks and have gained more than $32 so far this year, or 70 percent, though still about 46 percent below record highs above $147 hit in July last year.

"In anticipation of this week's API and EIA data, investors were expecting some pretty substantial drawdowns, not just in oil products but also in crude as refiners increased their operations," said Ben Westmore, commodities economist at National Australia Bank.

"A very rosy outlook had been pictured in the expectations for a crude drawdown rather than an increase in crude stocks, and so you had this moderation in the oil price."

Still, the rise in the industry figures paled in contrast to the declines in crude stocks of 4.9 million barrels in the week before last, data from the government Energy Information Agency (EIA) showed.

This followed slides of more than 3 million barrels in the previous two government reports.

Gasoline stocks fell by an unexpected 1.4 million barrels, the API data showed, after a Reuters poll forecast a 500,000-barrel build.

Distillate fuels fell by 3.5 million barrels as cold weather hit the U.S. Northeast, the world's biggest heating oil market. Heating oil stockpiles dropped by 2.6 million barrels.

Temperatures in the U.S. Northeast were seen average below normal on Wednesday and near to above normal on Thursday and Friday, while temperatures in Northwest Europe were forecast near to below normal with energy demand for heating near to above average much of the week and weekend.

EIA's weekly inventory data are due out at 10:30 am EST (1530 GMT) on Wednesday.

"API data is generally just a lead to the EIA. That's the one that really causes the market to move," Westmore said. "We really need further drawdown of products and distillates stocks in order to see oil price move higher."

Strong dollar caps oil gains

The rise in oil was curbed by the strong dollar, which posted gains against most major currencies, and climbed to a two-month peak versus the yen, boosted by a report showing a rise in U.S. consumer confidence this month.

Oil has often eased this year when the dollar firms, making crude more costly for holders of other currencies.

But the positive U.S. consumer confidence data for December, which hit a three-month high as job market pessimism eased and consumers' expectations touched a two-year high also gave oil a lift.

Asia's two leading economies and energy consumers are also upbeat on the economy.