TOKYO: Oil edged up to around $42 a barrel on Wednesday supported by rising investor risk appetite and a report that U.S. fuel inventories fell, although rising crude supply and concern of stalling demand capped gains.

European equities rose after better-than-expected German manufacturing data, giving oil a boost. 

The American Petroleum Institute said U.S. inventories of gasoline and distillate fuel dropped, while those of crude rose. 

"The rebound in risk appetite today is lifting oil prices a little," said Craig Erlam, analyst at broker OANDA. "But it already faces stiff resistance."

Brent crude was up 14 cents, or 0.3%, at $41.86 at 1345 GMT, reversing an earlier drop. U.S. West Texas Intermediate crude was up 20 cents, or 0.5%, at $40.00. Both contracts fell more than 4% on Monday, though they rose on Tuesday.

In focus at 1430 GMT will be the official U.S. inventory numbers from the Energy Information Administration to see if they confirm the report from the API, an industry group. 

Surging COVID-19 infections in countries including India, France and Spain and new restrictions in Britain have renewed worries about demand, just as more supply may come from Libya. In the United States, the death toll has passed 200,000.

"Oil prices are still faring comparatively well today given all the headwinds they are facing – a firm U.S. dollar, concerns about demand, rising supply," said Carsten Fritsch of Commerzbank.

Oil collapsed as the pandemic decimated demand, with Brent falling below $16, a 21-year low, in April. A record output cut by the Organization of the Petroleum Exporting Countries and allies, known as OPEC+, has helped revive prices.

OPEC faces a new challenge in that Libya, an OPEC member exempt from the supply cut, is aiming to boost supply after an easing of the country's conflict.  Still, previous recoveries have not lasted.

(Additional reporting by Aaron Sheldrick; editing by Kirsten Donovan and Mark Potter) ((alex.lawler@thomsonreuters.com; +44 207 542 4087; Reuters Messaging: alex.lawler.reuters.com@reuters.net))