By Christopher Johnson

The European Commission said on Friday Russia and Ukraine had a last chance this weekend to solve the dispute blocking gas supplies or risk seeing their relations with the bloc suffer.

The European Union normally gets a fifth of all its gas from Russia via Ukraine. The loss of this supply has forced generators to switch to oil and coal at a time when Europe is experiencing sub-zero temperatures.

U.S. light crude for February delivery was up 10 cents at $35.50 a barrel by 10:17 a.m. EST, after earlier hitting a high of $36.73. The contract, which expires on Tuesday, briefly touched a low of $34.77. On Thursday, it sank to $33.20, the weakest in nearly a month.

London Brent crude for March was flat at $47.68, maintaining an unusual premium to the U.S. benchmark due to growing U.S. stockpiles.

"The cold weather is increasing demand for heating fuel and the Russia-Ukraine gas dispute is a factor too, at least for the market in Europe," said Christopher Bellew, broker at Bache Financial in London.

A dealer at a European trading house agreed the gas dispute was beginning to have an impact on the market in Europe: "It is mid winter and many power companies can't get their usual fuel."

Traders said a weaker dollar and stronger equities were also helping bolster the oil market.

IEA SLASHES DEMAND FORECAST

The market appeared to brush off bearish data from the International Energy Agency, which cut its forecast for world oil demand this year sharply.

The IEA said in its monthly oil report that world oil demand would contract as the economic slowdown eroded consumption. The agency revised its estimate for 2009 demand down by 940,000 barrels per day (bpd) to 85.3 million bpd -- a fall of about 500,000 bpd year-on-year.

The price of oil for delivery in February is down about 10 percent overall this week, as a string of dismal figures from major economies stung investor confidence and portended further weakness in oil demand in months ahead.

"Global oil demand is reducing at an alarming rate," said Rob Laughlin, senior oil analyst at MF Global in London.

"This latest report from the IEA is another warning shot across the bows to OPEC that supply is still outpacing demand and the situation is getting worse, seemingly day by day."

"Whilst OPEC is making an effort to adhere to quotas, the clear picture shows that another cut is required and soon."

In its report, the IEA said Chinese oil demand would grow at its slowest rate in eight years, rising just 90,000 bpd in 2009 as its GDP growth slows to 6.5 percent.

OPEC, which has already cut 4.2 million bpd in supply from the world market since September, could quickly deepen output cuts if needed, OPEC President Botelho de Vasconcelos has said.

The global financial crisis has forced many economies into recession, reducing energy consumption and dragging down oil prices by more than $110 since a record peak in July.

Bank of America , which recently absorbed Merrill Lynch, and Citigroup both reported huge losses for their fourth quarters on Friday, including billions of dollars of writedowns from exposure to debt and real estate markets.

(Editing by Anthony Barker)