Oil rebounded on Wednesday in reaction to the previous session's activity, when it racked up the biggest drop since February after China surprised markets by raising interest rates for the first time in nearly three years.

Tuesday's move knocked down prices by more than 4 per cent to below $80 for the first time this month.

But on Wednesday US crude for November, the front month until the contract expires by the end of the session, bounced back 48 cents to $79.97 a barrel by 0305 GMT, after touching $79.25 on Tuesday, the lowest price since Sept. 30.

The more liquid December contract, which will become the front month from Thursday, gained 39 cents to $80.55.

ICE Brent for December rose 39 cents to $81.49.

China, the world's second-largest oil user, has been the main driver of growth in the crude market so far this year, as imports soar, while an inventory overhang in top consumer the United States has dragged the market lower.

"It seems to me there was a very knee-jerk reaction to the China move across all commodities, and now people are starting to step back and think about what it actually means for Chinese growth," said Yingxi Yu, a Singapore-based commodities analyst with Barclays Capital.

"The answer is probably not much. The actual impact of this rate hike might be limited, on the overall growth story in China. I don't think fundamentally it changes the demand story."     On the contrary, it "reflects the confidence of Chinese policymakers that the recovery is pretty much on track," Yu said.

US crude reached a five-month high above $84 on Oct. 7 on expectations the Federal Reserve would embark on a second round of expansionary monetary measures to reinvigorate growth.

"We have been voicing our concerns about the sustainability of this price move because there is still a lot uf uncertainty about the macro backdrop," Yu said.

"This macro move in China has served to remove some optimism in other commodities as well. People are turning their attention again to the fact that there are tightening measures in some parts of the world."

China drives markets    

China's rate increase reflects concern about resurgent asset prices and could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.

But China's move may be supportive for commodities in the longer term, market participants said.

If there was ever any doubt about China's role in driving the stuttering global economic recovery, the impact was felt by markets across the board. Commodities prices tumbled, stocks turned negative in Europe and the dollar jumped on Tuesday.

Wall Street was hit by fears that US banks might be on the hook for billions of dollars in souring mortgage bonds, driving stocks to post their biggest loss in two months.

Japan's Nikkei average opened down 1.5 per cent on Wednesday, reflecting the sharp fall in US shares.

The dollar held firm in early Asian dealings on Wednesday with investors across the region poised to cut short positions a day after the surprise interest rate increase in China spurred the market to lower risk exposure.

US crude inventories rose by a greater-than-expected 2.3 million barrels last week while product stocks fell despite an increase in refinery operations, the American Petroleum Institute (API) said on Tuesday. A Reuters survey indicated crude stockpiles would rise by 1.9 million barrels.

Stocks of distillate fuel, including diesel and heating oil, fell by 854,000 barrels, roughly in line with expectations, while gasoline stocks fell by just 83,000 barrels, compared with analysts' forecasts for a 1.3-million barrel drop.

Government data from the US Energy Information Administration (EIA) will follow at 1430 GMT on Wednesday. – Reuters