Oil prices rose more than 2 percent to above $59 a barrel on Tuesday as the International Energy Agency boosted its 2007 demand forecast and predicted oil market fundamentals would tighten.

U.S. crude settled $1.25 higher at $59.07 a barrel, a day after it dropped $2.08 on signs that the Organization of Petroleum Exporting Countries would refrain from further supply cuts when it meets in March.

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London Brent crude for March delivery, which expired on Tuesday, settled up 43 cents at $57.03 a barrel. April Brent crude rose $1.40 to $58.78 a barrel.

Robust economic expansion in China, the world's second largest consumer, prompted the IEA to raise its forecast for 2007 oil demand growth to 1.55 million barrels per day from 1.39 million bpd in its monthly Oil Market Report.

"Upward demand revisions, a now-weaker non-OPEC growth trend and declining Iraqi production all point to markedly tighter global balances," said the IEA, which advises 26 industrialized nations.

Non-OPEC output growth continued to miss forecasts as new projects were delayed, while Iraq's dilapidated oil sector struggled to maintain output.

The IEA noted that supply curbs by OPEC had helped to drain stockpiles in major consuming countries of 40.2 million barrels in December and that downward trend continued in January.

The agency said any further OPEC cuts beyond the cartel's existing agreement to reduce output by 1.7 million bpd might be a step too far in its efforts to balance supply and demand.

Additional support for crude prices came from news of a brief fire at the crude distillation unit at Valero's 210,000 bpd refinery in Delaware City, Delaware.

SIGNALS THAT CUTS NOT NEEDED

OPEC ministers, including Saudi Oil Minister Ali al-Naimi, have signaled that further supply cuts probably would not be needed when the group meets on March 15 in Vienna.

Investment bank Goldman Sachs said lower oil prices since September had boosted demand and it expected inventories to drop further in coming months.

Goldman said it expected that, by this time next year, the price of oil would have risen to $71.90.

Goldman was the most bullish of the banks and analysts in a Reuters oil price poll, forecasting the average price of U.S. oil at $71.50 for the whole of 2007.

Stocks of heating fuel in the United States, the top consumer, were expected to have fallen last week in government data due Wednesday, after a recent cold spell stoked demand.

A Reuters poll of analysts forecast that U.S. distillate stocks, including heating oil, fell 4.2 million barrels last week.

U.S. crude stocks were forecast to have risen 1.2 million barrels as imports increased.

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