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A trader working in the crude oil and natural gas options pits on the floor of the New York Mercantile Exchange in New York August 8, 2011.SHANNON STAPLETON/Reuters

Brent crude rebounded 4 per cent Wednesday, shaking off two days of losses as an unexpected decline in U.S. oil inventories outweighed deepening economic concerns.

Oil extended gains in the afternoon in another heavy trading session as the U.S. stock market pared earlier losses due to concerns about the exposure of French banks to shaky European debt fears of trouble in French banks.

A steep decline in U.S. crude inventories as well as drops in refined product stockpiles for the week to Aug. 5 reported by the U.S. Energy Information Administration lifted prices in early New York trading.

The drawdowns, which countered forecasts for increases in U.S. stockpiles, helped counter the economic concerns that helped push Brent prices down 6 per cent following the downgrade of U.S. credit rating by Standard & Poor's on Friday.

"The inventory numbers showed that despite the fears of a slowing economy, maybe demand might not be as bad as we thought," said Phil Flynn, analyst at PFGBEST Research in Chicago.

Brent crude settled at $106.68 a barrel, gaining $4.11, but was still down on the week after tumbling more than 6 per cent last week.

U.S. light crude closed at $82.89 (U.S.), gaining $3.59, or 4.53 per cent, after falling 8.7 per cent in two prior trading days. It slid nearly 9 per cent last week.

U.S. government data showed U.S. crude stocks fell by 5.2 million barrels last week, confounding forecasts for an inventory build and confirming data released by the American Petroleum Institute released late Tuesday.

Supplies dropped after Tropical Storm Don hit the U.S. Gulf of Mexico last week, causing oil companies to reduce production in the region as they evacuated workers from offshore platforms.

Crude stored at the Cushing, Oklahoma, U.S. delivery hub fell 1.37 million barrels, its lowest level since November.

Further support came after report from private forecaster Accuweather that three potential tropical storms could spawn in the Atlantic over the next couple of weeks, traders said.

Brent's premium to U.S. futures held near record levels after topping $26 a barrel on Tuesday.

Brent futures have been supported in recent weeks by lower North Sea output and the exports of sweet crude shut off by Libya's civil war. However, North Sea crude oil output was scheduled to rise by 19 per cent in September due to a reduced impact on supplies from maintenance.

Oil trading volumes, which were muted for much of July, were strong for a fifth straight day, with Brent trade already eclipsing the 30-day average by 42 per cent in late afternoon activity. U.S. crude trade rose 28 per cent above its 30-day average.

In late trading, implied volatility for U.S. crude stood at 56.61 per cent on the Chicago Board Options Exchange's Oil Volatility Index, down 6.2 percentage points from Tuesday's settlement, but still at two-year record highs. The index has been erratic throughout the day, trading with an upward bias in a wide range that eclipsed Tuesday's strong range.

The high for the index was 70.37 per cent, achieved at 9:31 a.m. ET as the U.S. equities markets opened under Rule 48 provisions in anticipation of sharply lower stock prices. Since that higher open, the index has traded closer to Tuesday's settlement.

U.S. crude's Relative Strength Index (RSI) rose back to 29.5, just below the 30 threshold that signals oversold conditions, after sliding to 20.2 on Tuesday. The index began falling below 30 on Thursday for the first time since May.