Oil rose as a strike threat by oil workers in OPEC nation Nigeria stoked supply concerns ahead of a meeting of top producers and consumers aimed at tackling soaring energy prices.
U.S. light, sweet crude was up, while London Brent crude also rose.
Workers at the Nigerian unit of U.S. energy giant Chevron were poised to go on strike after talks between their union and management failed.
Further support came after the White House said it was not expecting Saudi Arabia to announce an output increase when producers and consumers meet in the Kingdom on June 22.
News the world's top oil exporter plans to ramp up output to help bring down high prices, which touched a record near $140 a barrel earlier this month, had weighed on prices earlier in the week.
"The news about Nigeria workers at Chevron ready to strike is unsettling because they produce light sweet crude, which we want and if OPEC doesn't raise output ... that's bullish for crude," said Mark Waggoner of Excel Futures.
Rising fuel costs have caused protests around the globe, prompting Saudi Arabia to call the meeting between producers and consumers in Jeddah.
Oil prices have jumped nearly 40 percent this year, extending a six-year rally that has sent prices up nearly seven-fold on rapid demand growth from emerging economies like China.
A surge in speculative buying by investors hedging against inflation and the weak dollar has accelerated the rally this year. Some analysts say rising investor flows have created an oil "bubble" that has inflated prices beyond what supply and demand fundamentals warrant.
President Bush on Wednesday called on Congress to lift a ban on offshore oil drilling to help ease prices, but analysts said this would bring little quick relief to consumers.
"We believe this (proposal) will have a limited impact given the long lag time to actual production and new supply coming online," said Chris Jarvis, senior analyst for Caprock Risk Management in New Hampshire.
Prices rebounded from earlier losses following the release of a weekly government inventory report showing U.S. crude oil stocks fell for a fifth week in a row, below analyst expectations, as a rise in refinery demand offset an increase in imports.
Stocks of distillates, including heating oil and diesel, rose by 2.6 million barrels, above forecasts for a 1.8 million barrels rise.
U.S. gasoline stockpiles fell 1.2 million barrels, compared with calls for an 800,000-barrel rise.
Oil prices reversed earlier losses and surged to nearly $137 a barrel.
U.S. light, sweet crude moved up late in the session. The contract briefly hit a record of nearly $140 on Monday.
London Brent crude also gained.
U.S. crude oil stocks fell for a fifth week in a row, in line with expectations, as a rise in refinery demand offset an increase in imports, the government said in its weekly report.
Distillate stocks, which include heating oil and diesel, rose by 2.6 million barrels, exceeding forecasts of a rise of 1.8 million barrels.
Gasoline stockpiles fell 1.2 million barrels, compared with predictions of a rise of 0.8 million barrels.
Oil had rallied over $135 earlier on news Nigeria's senior oil workers union said it will consider going on strike if talks with Chevron in a dispute over the transfer of the company's expatriate managing director fail by the end of Wednesday.
Oil traders said the market was also waiting to see the impact of news that Saudi Arabia was poised to pump oil at its fastest rate in decades next month.
"People are wondering whether the extra Saudi oil will pop the price bubble," said Christopher Bellew of Bache Financial.
The relentless rise in oil, which has pushed prices nearly 40 percent higher since January this year, has led to protests across the world and has alarmed governments worried about its impact on their economies.
Oil prices are up nearly sevenfold since 2002 on strong demand from emerging economies such as China.
A surge in speculative buying by investors hedging against inflation and the weak dollar has accelerated the rally this year.
While Saudi moves to dampen markets by pumping more oil, U.S. and British regulators unveiled a plan to slap position limits on U.S. crude contracts on the London-based ICE exchange to rein in speculators.
The combined effort among Saudi Arabia, the United States and Britain could rattle some investors and bring down prices, analysts said.