Oil rose more than $1 a barrel on Wednesday, within sight of Monday's record high above $143 on forecasts that global supply will lag demand and expectations the European Central Bank will raise interest rates later this week.

US crude rose $1.21 to $142.18 a barrel by 0215 GMT, while London Brent crude gained $1.52 to $142.19.

The International Energy Agency on Tuesday cut its global oil supply capacity forecast by 2.7 million barrels per day (bpd) to 95.33 million bpd by 2012, boosting prices already lifted by tension between Iran and Israel.

Traders also bought crude on the weak dollar, which softened on Tuesday ahead of Thursday's European Central Bank meeting, which is widely expected to conclude an interest rate hike to deal with quickening euro zone inflation.

"The US dollar is an each-way bet and will likely cause some volatility in prices," Mark Pervan, a senior commodities analyst at the Australian & New Zealand (ANZ) Bank, said in a research note.

"On balance, if Iran, Nigeria and Israel can stay out of the news for the rest of the week, traders should take profits," he added.

Oil hit a record $143.67 a barrel on Monday, taking its gains for the year to nearly 50 percent, in part due to concerns that tension between Israel and Iran could disrupt supply from the Middle East Gulf.

Iran's Revolutionary Guards had said it would impose controls on shipping in the Strait of Hormuz should the country be attacked. About 40 percent of all seaborne oil trade passes through the Strait, according to the US EIA.

The US State Department on Tuesday criticised comments by an unidentified senior US defense official who told ABC News there was an increasing likelihood Israel would attack Iran over its nuclear programme.

Adding to supply worries, Opec President Chakib Khelil said the cartel did not have enough spare capacity to replace Iranian oil if Tehran were to cut exports due to an attack.

Traders will look out for US oil inventories data later on Wednesday and the monthly US employment report due on Thursday for further indications of the economic outlook for the world's top oil consumer.

"We can expect oil price fluctuations to be limited today and tomorrow as the market is awaiting stocks in the US and payroll tomorrow," said Ryuichi Sato, a commodity analyst at Mizuho Corporate Bank.

Weekly US oil inventory data is expected to show a 100,000-barrel fall in crude stocks, a 200,000-fall in gasoline stocks, and a 1.9-million-barrel build in distillates. - Reuters