OIL prices rebounded yesterday, jumping back to US$116 a barrel after the government reported a bigger-than-expected drop in US gasoline supplies. But more signs of dwindling US demand cast doubt on the rally's durability.

In its weekly inventory report, the US Energy Department's Energy Information Administration said gasoline supplies fell by 6.4 million barrels to 202.8 million barrels for the week ended August 8, nearly three times more than the 2.2 million barrel drop analysts surveyed by energy research firm Platts had expected.

The big drop in gasoline stocks prompted traders to buy oil and gasoline contracts on signs of supply tightness. However, analysts said the surprisingly large drawdown suggests that US refineries are scaling back on production in response to falling demand, not that Americans are suddenly driving more because of easing pump prices.

"There's no doubt that refiners are making less gasoline," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago. "The demand is bad so why store a product that you're going to have trouble selling?"

Light, sweet crude for September delivery rose US$2.99 to settle at US$116 a barrel on the New York Mercantile Exchange, after earlier falling as low as US$112.87. Oil's advance has, for the time being, stopped a monthlong slide that took crude US$35 below its July 11 high of US$147.27.

Gasoline futures also jumped, with the September contract adding 8.91 cents to settle at US$2.9323 a gallon on the Nymex. Heating oil futures rose 5.89 cents to settle at US$3.1317 a gallon.

Despite the rebound, analyst doubted crude would regain the upward momentum seen last month, noting that traders have been quick to cash in on oil rallies in recent weeks and send prices lower.

"We've got a good-sized rally ... but it still doesn't feel like it's sustainable. We're not seeing the frenzy of buying that we would have seen a couple months ago," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Illinois.

"I think the true underlying demand weakness is still out there," he added, saying he believed that Americans were not yet reacting to easing pump prices by driving more. "I don't think people are going to change their commuting habits that fast."

The EIA said demand for gasoline over the four weeks ended August 8 was almost 2 percent lower than a year earlier, averaging 9.4 million barrels a day.

The EIA also said crude stockpiles fell 400,000 barrels to 296.5 million barrels last week; analysts had expected crude supplies to increase by 500,000 barrels.

Inventories of distillate fuel, which include diesel and heating oil, decreased by 1.7 million barrels to 131.6 million barrels for the week ended Aug. 8. Analysts expected distillate stocks to rise by 1.9 million barrels.

Meanwhile, a cease-fire declared by Russia and Georgia in their conflict over South Ossetia appeared to lower concerns that hostilities there could curtail oil shipments through Georgia.

The International Energy Agency dropped its forecast on Tuesday for oil product demand from 30 developed countries, located mostly in Europe and North America, to 48.6 million barrels a day, down 1.3 percent from last year.

The Paris-based energy watchdog's report arrived a day after China said its crude imports in July, while historically strong, were down 7 percent from the same month last year.

The IEA cautioned it is too early to determine whether the recent fall in oil prices is a longer-term trend.

In other Nymex trading, heating oil futures rose 5.89 cents to settle at US$3.1317 a gallon, while natural gas futures rose 12.6 cents to settle at US$8.456 per 1,000 cubic feet.