Oil extended gains toward $70 on Wednesday, after surging more than 3 percent in the previous session on data that showed a surprise fall in U.S. crude stocks, boosting hopes of demand recovery in the world's top energy user.

The release of the more closely watched U.S. Energy Information Administration (EIA) data later in the day could confirm the American Petroleum Institute's (API) bullish figures, and will determine the market's trading tone for the rest of the week.

By 0245 GMT, U.S. crude for September delivery was up 70 cents at $69.89 a barrel, off an earlier session high of $70.50. London Brent crude for October was up 41 cents at $72.78.

What's keeping the market down is high U.S. inventories, which is a proxy for demand, so the bullish API report has turned sentiment around, said Tony Nunan, risk manager at Tokyo-based Mitsubishi Corp.

If the EIA data confirms the API report, we could see the market head higher. The $76 level will be a top for the market in the medium term until we see further drawdowns in the inventories, he added.

API data released late on Tuesday showed that U.S. crude oil stockpiles fell last week by 6.1 million barrels, against forecasts for a 1.3 million barrel build.

U.S. distillate stocks rose by 1.5 million barrels, more than double what analysts had expected, while gasoline stocks fell less than forecast.

EIA figures will be released at 1430 GMT.

Further boosting sentiment was Wall Street's strong performance on Tuesday, when U.S. stocks rebounded from sharp losses in the previous session, as better-than-expected results from big retailers encouraged investors to return to the market. <.N>

Earnings from major U.S. retailers Home Depot and Target beat Wall Street expectations, offsetting government data that showed U.S. housing starts and permits fell unexpectedly in July after increasing in June.

Traders are also keeping an eye on storms in the Atlantic Basin, as any potential output disruption could boost prices, but there was no immediate threat seen to U.S. oil installations in the Gulf of Mexico.

The region is home to a quarter of U.S. oil output and 15 percent of its natural gas production.

Hurricane Bill, the first hurricane of the 2009 Atlantic season, strengthened into a Category 3 storm on Tuesday with top winds near 125 miles per hour (205 km per hour), the U.S. National Hurricane Center said.

(Editing by Ben Tan)