Oil prices held above $90 a barrel, close to their highest in two years on Thursday, after cold weather boosted demand and U.S. stockpiles shrank.

Unusually cold weather in the United States and Europe has helped to spur the latest leg of a more than 30 percent rally from a year-low struck in May.

U.S. crude for February eased four cents to $90.44 a barrel by 0949 GMT (4:49 a.m. ET), after settling at the highest level since October 2008 on Wednesday, just off a session peak of $90.80. ICE Brent crude traded 15 cents lower at $93.50.

Wednesday's strong settlement followed U.S. inventory data showing a big drop in crude stocks, although analysts said there could be an element of distortion because of a year-end draw down for tax purposes.

The market is still trying to test resistance at the previous high, said Olivier Jakob of Petromatrix. In the (U.S. inventory) report per se there was nothing apart from a normal seasonal draw-down.

Prices could also be exaggerated by thin trade over the end-of-year holiday period.

Stockpiles in the world's biggest oil user have fallen by 19 million barrels since November 26, roughly equivalent to one day of U.S. fuel consumption and the biggest three-week drop since 1998.

Demand has been stoked by sub-normal temperatures, which are expected to continue.

Forecaster AccuWeather.com expects temperatures in the U.S. Northeast, the world's largest heating oil market, to average mostly below normal for the next week, while U.S. heating oil demand was expected to average 4.6 percent above normal this week.

ECONOMIC IMPACT?

After a contraction in demand following global economic recession, fuel use has begun to rebound and is expected to continue growing next year taking absolute oil consumption to an all-time high, although the rate of growth will still be lower than a peak hit in 2004.

The Organization of the Petroleum Exporting Countries, however, has yet to change its output targets, which have officially been the same since it announced a record cut in production in December 2008.

Leading exporter Saudi Arabia has said $70-$80 is the best range for producers and consumers, ensuring enough revenue to generate investment in new supply while avoiding the economic damage that could destroy demand.

Others in the group have pressed for a higher price and some analysts consider the world could tolerate that, especially as waves of quantitative easing have helped to weaken the dollar, making dollar-denominated commodities, such as oil relatively cheap, although that is partly offset by a weakened euro. <.DXY>

Serene Lim, an oil analyst at ANZ, saw scope for the rally to continue before it squeezed the economy.

Oil prices anywhere above $110 will start to eat into economic growth, Lim said.

(Additional reporting by Randolph Fabi and Seng Li Peng in Singapore; editing by Sue Thomas)

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