Brent was steady around $118 (U.S.) on Thursday, after surging in the previous session as Saudi Arabia failed to convince OPEC members to raise output targets and data showed U.S. crude stocks fell sharply last week.
OPEC talks broke down in acrimony, underlying concerns about the group's willingness to help control prices. Saudi Arabia pledged unilaterally to ensure plentiful supplies, helping cap gains in Brent.
Still, it is a stretch for the Kingdom alone to be able to lift output by the 1.9 million barrels per day needed to fully supply the 30.87 mbpd the OPEC secretariat estimated in its May report would be needed to meet demand in the third quarter, analysts led by Lawrence Eagles at JPMorgan said in a report.
"What this means is that there will be less spare capacity to handle another unforeseen outage," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp.
"The market will price in this risk premium, and the way they do that is by speculators coming in and buying it up."
Brent crude for July delivery rose 3 cents to $117.88 a barrel by 0651 GMT, after settling $1.07 higher at $117.85 on Wednesday in volumes more than a third higher than the 30-day average.
U.S. crude rose 50 cents to $101.24, having settled $1.65 higher at $100.74 a barrel.
Saudi Arabia produced 8.8 mbpd in April, according to JPMorgan. Eagles said the bank retains its view that oil will reach $130 a barrel by 2011, "but arguably we now not only have to watch Saudi Arabian comments closely, but also those of the International Energy Agency."
The Paris-based International Energy Agency, the industrialized nations' energy watchdog, said it stood ready to release oil stocks if Saudi Arabia could not fulfill all of the world's oil needs.
The United States, the world's top oil consumer, had put pressure on Saudi Arabia to deliver a credible deal to cap crude prices and underpin faltering economic growth.
Brent oil may break resistance at $118.91 and rise to $122.31 per barrel, according to Reuters technical analyst Wang Tao. U.S. oil may extend gains to $103 per barrel as indicated by a triangle pattern, he said.
U.S. President Barack Obama was keeping open the option of using strategic oil reserves to cover any supply gap in the world's largest economy, but no decision had been made, a White House spokesman said.
U.S. inventory data on Wednesday provided a mixed picture for the market, with gasoline stocks up a more-than-expected 2.21 million barrels last week to 214.49 million.
Domestic crude stocks, however, tumbled 4.8 million barrels, the Energy Information Administration said, surpassing analysts' expectations for a 300,000 barrel decline.
"The resulting tightening in oil stocks is something that we believe can be maintained, and causes us to continue to favour the long side of the market in the near term," said Tom Pawlicki of MF Global.
Oil prices have rallied since the start of the year on the loss of Libyan oil production because of a civil war, and were approaching 2008 peaks before falling by more than 10 percent in early May. They have traded in a narrow range since then.
Western and Arab nations meet in Abu Dhabi on Thursday to focus on what one U.S. official called the "end-game" for Libya's Muammar Gaddafi as NATO once again stepped up the intensity of its air raids on Tripoli.
The dollar's rebound from one-month lows against a basket of major currencies helped offset some of the support from OPEC and tightening U.S. crude stocks.