Oil hovers below record after fall in U.S. stocks

SINGAPORE (Reuters) - Oil prices held steady around $111 a barrel on Thursday, within sight of the previous day's record high after a sharp fall in U.S. crude and fuel stocks rekindled concerns about summertime supplies.

U.S. crude CLc1 erased light early losses to rise 9 cents to $110.96 a barrel by 0203 GMT, just below its peak of $112.21 touched in the previous session. London Brent crude LCOc1 rose 2 cents to $108.49 a barrel, about $1 shy of its record.

Prices surged 2 percent on Wednesday after data showed U.S. crude oil inventories fell 3.2 million barrels last week as imports declined, countering earlier expectations for a build, while gasoline and distillate stocks also fell, data from the Energy Information Administration showed. [EIA/S]

"The data fuelled concerns of tight oil market conditions, pushing prices higher," said Commonwealth Bank of Australia's commodity strategist David Moore, in a research note.

U.S. gasoline and heating oil futures, as well as London gas oil, hit record highs after concerns about diesel supplies following a European refinery outage and after months of strong import demand from China, the world's number two oil consumer.

The premium for U.S. heating oil futures over crude CL-HO1=R has surged over $5 to $25 a barrel this week, near the record high touched in the wake of Hurricane Katrina in 2005.

"The U.S. market is propped up -- even galvanized -- by increasingly heated global competition for scarce refinery supply, but the outlook for U.S. domestic demand is lacklustre," said Antoine Halff, Deputy Head of Research at brokers Newedge.

Oil also benefited from a broad commodities rally fuelled by the weakening dollar, which fell against the euro and the yen on views the U.S. Federal Reserve could cut interest rates by 50 basis points this month to stave off a possibly severe U.S. economic recession. [nT344901]

Although investors are rushing into commodities as a hedge against the weakening dollar as the U.S. economy falters, a possible recession would also cut into oil demand in the world's top consumer, where drivers are already reacting to high prices.

On Tuesday the U.S. government forecast that summer driving use would fall for the first time since 1991.

And despite a plea from consuming nations for OPEC to raise oil production to help cap rising oil prices, cartel members insist the markets remain well supplied.

(Reporting by Luke Pachymuthu; editing by Louise Heavens)