Crude oil for March delivery rose $2.71, or 6.6%, to end at $43.55 a barrel on the New York Mercantile Exchange.
Oil futures rose "amid hopes OPEC [members] will succeed in cutting production close to their quota," said Nimit Khamar, analyst at Sucden Financial Research.
The Organization of Petroleum Exporting Countries pledged in December to reduce daily output by 4.2 million barrels from September levels.
Kuwait has told its customers that it's cutting oil supply in line with OPEC's December decision, while Botelho de Vasconcelos, the Angolan official who is OPEC's new president, said that the cartel is fully enforcing the supply cuts, according to a Reuters report.
"The market has been in an extraordinarily large contango that is not sustainable long-term and a good portion of the increase is due to the March contract closing on the other contracts," said James Williams, an economist at WTRG Economics.
Contango is a situation in which the price of a short-term futures contract is worth less than a longer-term one. Crude for August delivery, for example, is trading near $50 a barrel, while March crude is near $43.
"The news about the decline in Mexico's production is probably adding some support as well as some optimism about Obama's stimulus package," Williams said.
Mexico's oil production fell 9.2% to average 2.799 million barrels per day in 2008, Reuters reported Wednesday, citing state oil company Pemex. Pemex said Mexico's crude oil exports fell 16.8% to average 14.03 million barrels per day, according to the report.
"The production declines are due to the maturity of the company's main oil field, Cantarell, and to the difficulty in completely offsetting Cantarell losses with production from other existing fields," said Allyson Benton, an analyst at Eurasia Group, in a research note.
"The company's exploration plans over the next several years are unlikely to lead to major new oil discoveries that can compensate for production losses in the near term," Benton said.
In addition to supply concerns, prices also got a lift from hopes that stimulus would boost demand.
A day after the inauguration of President Barack Obama, House lawmakers began work Wednesday on a massive economic stimulus bill developed in consultation with Obama. The legislation aims to jump-start growth and jobs through huge amounts of government spending and deep tax cuts.
Timothy Geithner, Obama's nominee to be the nation's next Treasury secretary, said that the president is also on a comprehensive bank-rescue package that will be unveiled in the next few weeks.
In testimony Wednesday before the Senate Finance Committee, Geithner didn't say how much the new package would cost. He refused to give specifics, saying that Wall Street wouldn't benefit from advance signals.
Read more on Geithner's testimony."It seems to me that crude was feeling a bit oversold in the $30's, and with more uncertainty concerning the issues in Gaza and possible policy shifts with the new administration, crude is finding a bid temporarily," said Zachary Oxman, a senior trader at Wisdom Financial.
Inventory data ahead
Energy traders will have to wait another day for the latest government data on U.S. petroleum stockpiles.
The Energy Information Administration will report its latest data at 11 a.m. Eastern time on Thursday, a day late because of Martin Luther King Jr. Day on Monday, and Inauguration Day on Tuesday. The American Petroleum Institute will also release its weekly report on energy supplies. Analysts expect a buildup of 1.9 million barrels of U.S commercial crude inventories for the week ended Jan 16, according to a Platts survey.
They also anticipate a week-to-week increase of 1.9 million barrels for gasoline stocks as well as a decline of 2.25 million barrels for distillates, the survey showed. The analysts project a drop in the refinery utilization rate of 1.4 percentage points, to 83.8%.
Traders will be watching closely inventory levels at Cushing, Okla. -- the delivery point for Nymex oil futures. Inventories at Cushing jumped to 33 million barrels in the week ended Jan. 9, the highest level on record.
Platts estimates that maximum storage capacity at Cushing is about 42.4 million barrels, but only 80% of that is considered operable.
"There apparently has been a growing sentiment that storage at Cushing ... had reached capacity, placing extraordinary pressure on the front-month contract," said John Kilduff, an analyst at MF Global, in a research note.
The discount to Brent crude, which is traded in London, reached $11 a barrel at one point last week, he said.
"The entire debate, though, is a consequence of falling demand, which puts pressure on the front of the market, as unsold barrels swell supply," Kilduff said. "As the price drops, there is less and less urgency to bring these barrels to market, so they are subsequently stored against future use."
Angling for equilibrium
There are expectations that factors of supply and demand would reach equilibrium by the end of the year, said Khamar of Sucden Financial.
"The hoped-for equilibrium may take longer to achieve than the end of this year, given the global economic outlook continues to deteriorate far worse than people anticipated," Khamar said.
At the same time, front-month contracts could find support compared with fourth-quarter contracts on hopes that the recent production cuts would dent excess supply in the near term, he said.
Rounding out Wednesday's energy trading, March reformulated gasoline rose 3 cents to $1.20 a gallon and March heating oil added 1 cent to $1.38 a gallon.
February natural-gas futures rose 14 cents to end at $4.78 per million British thermal units.
The Energy Information Administration will report on gas supplies in storage at 10:30 a.m. Friday, also a day later than usual. Analysts at IHS Global Insight are projecting a storage withdrawal of 149 billion cubic feet for the week ended Jan. 16.
