Brent crude edged towards $125 a barrel on Wednesday, rebounding from sharp losses a day earlier, as lower-than-expected US crude stocks and a weaker dollar offset the prospect of top exporter Saudi Arabia ramping up supply.

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 is expected to keep a lid on gains.

"The lower stocks is 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 56 cents to $124.68 a barrel by 0254 GMT, after falling over a dollar in the previous session on the Saudi comments.

US crude was up 76 cents, or 0.7 per cent, at $106.83. The benchmark plunged over 2 per cent on Tuesday.

Oil prices also received a boost after the greenback fell 0.3 per cent against a basket of currencies, making dollar-denominated commodities cheaper when purchased in other currencies.

US crude stockpiles fell 1.4 million barrels in the week to March 16, compared with analysts' expectations for an 2.4 million barrel build.

Crude stocks at Cushing, Oklahoma, the delivery point for the benchmark West Texas Intermediate crude, fell 194,000 barrels, the data showed.

The market will now await inventory data from the US Energy Information Administration on Wednesday for confirmation of the drawdown.

Saudi supply

Saudi Arabia sought to soothe fears about high oil prices, saying on Tuesday that world supplies were well in excess of demand and that crude at $125 a barrel was not justified given the anaemic 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 over $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.

The US 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 $10-$15 a barrel premium 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 per cent to an average of $119 a barrel in 2012 over the previous year, while US crude could gain 10.5 per cent to an average of US$105 a barrel. – Reuters