NEW YORK (Reuters) – Oil prices climbed over 3% on Wednesday on signs of improving demand and a drawdown in U.S. crude inventories, but gains were capped by worries over the economic fallout from the coronavirus pandemic and weak refining margins.

Brent crude LCoc1 settled $1.10, or 3.2%, higher at $35.75 per barrel while the new front-month July U.S. crude futures CLc1 ended up $1.53, or 4.8%, at $33.49. Both benchmarks rose more than 5% during the session.

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Last month, the May U.S. crude contract sank well below zero ahead of expiry as storage filled rapidly.

U.S. crude inventories fell by 5 million barrels last week, Energy Information Administration data showed, while stocks at Cushing, Oklahoma, delivery hub for U.S. futures dropped by 5.6 million barrels. [EIA/S]

“What this report confirms is that your worse nightmare – that we’re going to run out of storage space – is probably not going to happen,” said Phil Flynn, senior analyst at Price Futures Group.

Fuel demand has grown as lockdown curbs have eased worldwide, and initial shipping data show strong compliance with production cuts from the Organization of the Petroleum Exporting Countries and its allies.

But weak crude refining profits could delay a recovery in demand. Refiners hope the easing of lockdowns will boost buying.

U.S. gasoline and distillate inventories rose last week, data showed.

“We need to see more signs that rebalancing is taking place, primarily through more demand,” said Gene McGillian, director of market research at Tradition Energy.

Lingering concerns about the economic fallout from the coronavirus pandemic, especially in the United States, the world’s biggest oil consumer, kept a lid on gains.

At the latest meeting, Federal Reserve policymakers left interest rates near zero and repeated a vow to do what it takes to shore up the economy.

“Unless there is a major event that will turn the table in the supply-balance relationship (such as a new OPEC decision or more extended cuts, possible new lockdowns that affect demand), we expect prices to stay around the current levels,” said Rystad Energy’s senior oil markets analyst Paola Rodriguez Masiu.