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SINGAPORE (Reuters) - Brent crude edged towards $125 a barrel on Wednesday, pulling back from sharp losses a day earlier, as a surprise drawdown in crude stocks and a weaker dollar offset the prospect of a ramp up in supply by top exporter Saudi Arabia.
Industry data showed an unexpected 1.4-million-barrel decline in crude stockpiles last week, but comments by the Saudi oil minister that the kingdom was prepared to meet any supply shortfall are expected to keep a lid on gains.
"The lower stocks are giving support to the market, but the Saudi comments will put a short-term cap on the oil price, and ease fears of supply issues emanating out of Iran," said Ben Le Brun, market analyst with OptionsXpress in Sydney.
Brent crude gained 31 cents to $124.43 a barrel by 0720 GMT, after falling more than a dollar in the previous session on the Saudi comments.
U.S. crude was up 58 cents at $106.65. The benchmark plunged more than 2 percent on Tuesday.
Oil prices also received a boost after the greenback fell 0.3 percent against a basket of currencies, making dollar-denominated commodities cheaper when purchased in other currencies. .DXY
PDF of Iran reports: link.reuters.com/duf27s
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U.S. crude stockpiles fell 1.4 million barrels in the week to March 16, data from the American Petroleum Institute showed, compared with analysts' expectations for a 2.4 million barrel build. <API/S>
Crude stocks at Cushing, Oklahoma, the delivery point for the benchmark West Texas Intermediate crude, fell 194,000 barrels, data showed.
The market will now await inventory data from the U.S. Energy Information Administration on Wednesday for confirmation of the drawdown. <EIA/S>
China's crude inventory was also lower last month, with commercial stocks falling 3.77 percent by the end of February from a month earlier, official news agency Xinhua said on Wednesday.
Saudi Arabia sought to soothe fears about high oil prices, saying on Tuesday world supplies were well in excess of demand and crude at $125 a barrel was not justified, given the anemic state of the world economy.
Saudi Oil Minister Ali al-Naimi said the kingdom had met all its customers' requests for oil and stood ready to raise output to full capacity of 12.5 million barrels per day (bpd), if needed.
At more than $124 a barrel, Brent is trading just $23 short of an all-time high, as tighter Western sanctions on Iran threaten to slow the country's exports.
China imported a record 1.39 million barrels per day of crude oil from Saudi Arabia in February, 38.6 percent higher than a year earlier, while slashing Iranian imports by around 40 percent, official data showed on Wednesday. <O/CHINA1>
The U.S. on Tuesday exempted Japan and 10 EU nations from financial sanctions because they have significantly cut purchases of Iranian crude oil, but left Iran's top customers China and India exposed to the possibility of such steps.
Supply disruptions from Iran and other producers in the Middle East and North Africa (MENA) have added a premium of $10-$15 a barrel to oil prices, analysts at ANZ Bank said in a report.
"The rub is the risk premium can be washed out as quickly as it was built in, if MENA concerns abate," the report said.
The bank forecasts Brent to rise 7.2 percent to an average of $119 a barrel in 2012 over the previous year, while U.S. crude could gain 10.5 percent to an average of $105 a barrel.
Editing by Himani Sarkar