Oil rebounded to near $125 a barrel on Friday, led by the bullish heating oil market as China and Europe scramble for barrels, thinning global supply.

US crude for June delivery rose 74 cents to $124.86 a barrel by 0431 GMT, just 1.7 percent below Tuesday's all-time peak of $126.98.

New front month July ICE Brent was 97 cents higher at $123.60 a barrel, off an intraday high of $123.71.

Nymex June heating oil was up 0.19 cents at $3.6410 a gallon, just below the record high of $3.7228 seen on Wednesday.

'Global supply of distillates is very tight,' said Tetsu Emori, fund manager at Astmax Co Ltd in Tokyo.

Surging demand from developing countries, such as China, is helping bolster heating oil prices. PetroChina is seen buying a third more diesel at 400,000 tonnes for June versus May's levels, following a deadly earthquake that has cut supplies of natural gas-generated power.

Thin gas oil stocks in Northwest Europe caused by a string of refinery outages have also prompted players to scramble for Asian barrels.

The dollar weakened against the euro, adding to Thursday's losses after data showing US industrial production fell 0.7 percent in April, the biggest drop in the manufacturing sector since September 2005.

Oil and the US currency have become closely intertwined in recent months as investors have turned to oil as a hedge against the falling dollar.

US President George W. Bush heads for Saudi Arabia on Friday to renew his appeal for the world's biggest producer to help tame record oil prices.

However, the country's oil minister reiterated on Thursday that prices had more to do with financial market volatility than fundamentals.

The oil cartel's Monthly Oil Market Report provided more evidence that record oil prices are slowing demand growth. It lowered its forecast for 2008 world demand growth to 1.16 million barrels per day, 40,000 bpd less than its previous forecast. -Reuters