Comments from Federal Reserve Chairman Ben Bernanke saying that the stimulus package being crafted by President-elect Barack Obama and Congress could provide a 'significant boost' to the sinking US economy also helped lift the market.

By mid-afternoon in Europe, light, sweet crude for February delivery was up 35 cents to US$37.94 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, prices fell as low as US$36.10 and then briefly exceeded US$38 before retreating.

In London, February Brent crude rose US$1.21 to US$44.12 a barrel on the ICE Futures exchange.

Saudi Arabia, the largest producer in the Organisation of the Petroleum Exporting Countries, announced during the weekend that it would cut oil output by about 300,000 barrels per day below its recently agreed Opec quota.

'Opec is starting to get concerned - again - and the ministers are determined to generate a rally,' said a report from US energy consultancy Cameron Hanover, which urged the US government to increase the level of its Strategic Petroleum Reserves.

'It would help raise prices to a level that could get Opec feeling less vulnerable (and less likely to cut output again) at the same time that it would save the surplus for later,' Cameron Hanover said.

Prices of futures contracts for later this year are higher than the February contract on investor expectations that Opec's announced production cuts of 4.2 million barrels a day since September will begin to reduce global supply.

The June contract was trading on Tuesday at US$51.11 a barrel.

'There's some wariness that the OPEC actions may cause markets to tighten up,' said Mr David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney, who expects oil to average US$55 a barrel this year.

Still, before Tuesday oil prices had fallen for five sessions in a row and continued to seem 'susceptible to further declines,' said an energy report from Sucden Financial Research in London.

'After some transient end-of-year strength, it would appear that crude oil bears have once again found their groove,' said the Schork Report, edited by oil trader and analyst Stephen Schork.

Crude prices have fallen more than 25 per cent since reaching just above US$50 a barrel last week as traders returned from the holiday break to find evidence of falling manufacturing and consumer spending across the globe.

The February contract fell 8 per cent on Monday, or US$3.24, to settle at US$37.59 after Alcoa Inc., the world's third-largest aluminum company, reported a quarterly loss of US$1.19 billion.

Alcoa, the first component of the Dow Jones industrial average to post results, said last week it plans to lay off about 13 per cent of its global work force by the end of 2009 amid sinking prices and demand for the metal.

The Dow fell 1.5 per cent on Monday and has dropped 3.5 per cent this year.

'The negative sentiment we're seeing reflects the broad international macroeconomic outlook, which is considerably weaker, and what that means for energy consumption,' said Mr Moore.

Prices have fallen despite continued fighting between Israel and Hamas in Gaza. After initially spurring a jump in oil prices, the Gaza conflict has been largely ignored by traders because it hasn't affected major supplies and no oil-rich Middle East neighbors have become directly involved.

'The impact on oil supply is obviously limited,' Mr Moore said.

Investors are also looking for signs that demand from emerging markets, which helped drive oil's rise to US$147.27 a barrel in July, will rebound.

'Growth concerns will dominate for the next few months,' said Mr Robert Prior-Wandesforde, co-head of Asian economic research at HSBC in Singapore. 'Commodity prices will start to improve as sentiment about China and India starts to turn later this year.'

In other Nymex trading, gasoline futures rose 2.98 cents to US$1.1139 a gallon. Heating oil advanced 3.56 cents to $1.5080 a gallon while natural gas for February delivery slid 7.7 cents to $5.465 per 1,000 cubic feet. -- AP