Brent crude rose above $121 on Wednesday, halting a two-day decline, as traders focused on the stalemate in Libya and a sharp fall in U.S. gasoline stocks ahead of peak demand season, while global agencies warned high prices could erode demand.

Concerns grew this week that high oil prices are beginning to dent oil demand growth and could hurt the global economic recovery, with warnings from several key forecasters, while Goldman Sachs' forecast of a lower Brent price also damped sentiment.

ICE Brent crude for May rose 40 cents to $121.32 a barrel by 0334 GMT. U.S. crude for May delivery fell 4 cents to $106.21 a barrel. The contract's 5.8 percent drop from Friday was the biggest two-day percentage loss since May 2010.

Their expectations are too bearish even for next year. Much higher prices should be seen in the first half of the next year as the global economy recovers, Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments said, adding that he expects prices to rise to $150 a barrel within a year.

Gasoline-related factors should drive oil prices (in the near term), Emori said, pointing to a sharp drop in U.S. inventories and the approach of the peak driving season in summer.

However, gasoline and distillates stocks fell sharply more than expected last week as refinery use slumped, data from the American Petroleum Institute industry group showed late on Tuesday.

U.S. crude inventories rose 1.2 million barrels in the week to April 8, compared with analysts' expectations for a 1 million barrel build in a Reuters poll.

The U.S. Energy Information Administration's inventory report is due on Wednesday at 1430 GMT.

DEMAND FEARS

Several key forecasters, including the International Monetary Fund, the International Energy Agency and OPEC, raised fears global fuel demand is ebbing as consumers shunned expensive oil.

Top oil exporter Saudi Arabia has also quietly cut production on weaker demand, two Saudi-based industry sources told Reuters.

There have been plenty of negative factors for oil in the last 48 hours, Ben Le Brun, Sydney-based analyst at CMC Markets said, referring to the weak forecasts and a worsening of the Japan nuclear situation. It's probably not a bad thing as inflation is the biggest buzzword around the market.

High prices are beginning to dent oil demand growth and could slow the rapid pace of global economic growth, the International Energy Agency, an energy policy adviser to Western consuming nations, said.

Many traders booked profit after Goldman Sachs urged investors to do so in its second report in as many days.

Goldman expects Brent to fall toward $105 in coming months, the bank said in a note emailed to clients, after recommending on Monday that they close its trade on a basket of commodities that included U.S. crude.

LIBYA STALEMATE

Oil remained supported by unrest in the Middle East and Africa as pro-democracy protests flared up across the region while Libya is in a stalemate after an African Union-sponsored peace plan collapsed this week.

With the Middle East and North Africa crisis, there is at least a 20 percent premium built in oil prices, Le Brun said.

Foreign ministers meet in Qatar on Wednesday for talks on Libya's future.

BRENT-WTI TO NARROW

J.P. Morgan analysts said Brent's premium against U.S. crude, also known as West Texas Intermediate (WTI), could narrow in the coming month as complex refineries return from seasonal maintenance, reducing light sweet crude demand.

It is important to reiterate that this would be a temporary shift, the analysts led by Lawrence Eagles said in an April 12 note. Once we get to the end of the third quarter, the Cushing bottleneck should once more re-emerge.

Technical charts showed Brent's premium to WTI crude is expected to narrow to $8 per barrel over the next four weeks, Reuters market analyst Wang Tao said.

(Editing by Clarence Fernandez)

Fall Libya