Light, sweet crude for March delivery rose 60 cents to $34.58 a barrel by midafternoon in Europe on the New York Mercantile Exchange. The contract fell $1.96 overnight to settle at $33.98 a barrel.
Still, prices are not far from their five-year low at $33.20 a barrel in December, down from a record $147.27 in July.
Oil prices found support on reports the government may subsidize mortgage payments for troubled homeowners and offer some kind of boost to the troubled U.S. economy, the world's biggest consumer of oil.
The idea of targeted help for homeowners impressed investors more than the government's $789 billion economic stimulus package and its revised plan to bail out ailing banks.
A surprise jump in U.S. retail sales for January also offered a glimmer of hope about the world's largest economy, though other data painted a less optimistic picture.
Despite the slight improvement in oil prices, investors are worried that the worst U.S. recession in decades could be deepening, taking demand for crude down with it. Job losses are a particular concern as unemployment drags on consumer spending.
The number of Americans requesting first-time unemployment benefits remained near a 26-year high last week, the Commerce Department said Thursday. The number of initial jobless benefit claims were a seasonally adjusted 623,000, little changed from 631,000 the previous week, which was the highest number since October 1982.
The number of people claiming benefits for more than one week rose to 4.81 million two weeks ago from 4.78 million the previous week, the highest total since records began in 1967.
"The economic indicators in the developed world remain weak and that's impinging on oil demand," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "It's premature to say the fall in demand has bottomed."
U.S. oil storage sites, including the main depot in Cushing, Oklahoma, are brimming with crude, reflecting the drop-off in demand. Producers who might otherwise store their crude are dumping it onto the market, pushing the price down.
"The March contract price has been distorted somewhat by the build-up in Cushing," Moore said.
Contracts for later in the year show higher prices, reflecting investor expectations of a recovery in demand and supply cuts led by the Organization of Petroleum Exporting Countries. The April contract is trading at $42.14 a barrel and the June contract is at $47.62.
A $789 billion stimulus bill, which President Barack Obama could sign within days, will likely take months to impact consumer spending, and investors worry it may not spark a sustainable recovery.
"At this point, it's been fully priced in," Moore said.
The collapse in crude prices threatens to make some higher-cost fields unprofitable, which could lead producers to curtail output.
"We're at the point where you start to see marginal producers have to shut down production," said Peter Elston, a strategist with fund manager Aberdeen in Singapore. "That gives you quite a good support level for prices."
In other Nymex trading, gasoline futures fell 1 cent to $1.25 a gallon. Heating remained steady at $1.32 a gallon, while natural gas for March delivery rose 1 cent to $4.50 per 1,000 cubic feet.
In London, the March Brent contract fell 41 cents to $45.62 on the ICE Futures exchange.
Associated Press writer Alex Kennedy in Singapore contributed to this report.
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