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Oil rises to near $107 after US crude supply drop

Pablo Gorondi, Associated Press

Oil prices rose to near $107 a barrel Wednesday after a report showed U.S. crude supplies fell unexpectedly, a sign demand may be improving in the world's largest economy.

By early afternoon in Europe, benchmark oil for May delivery was up 49 cents to $106.56 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $2.49 to settle at $106.07 per barrel in New York on Tuesday after Saudi Arabia said it could pump more oil to cover any shortages.

In London, Brent crude for May delivery was up 27 cents at $124.39 a barrel on the ICE Futures exchange.

The American Petroleum Institute said late Tuesday that crude inventories fell 1.4 million barrels last week, breaking a two-month trend of growing supplies. Analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 2.1 million barrels.

Inventories of gasoline fell 1.4 million barrels last week while distillates rose 600,000 barrels, the API said.

The Energy Department's Energy Information Administration reports its weekly supply data later Wednesday.

Saudi Arabia, the world's largest crude producer, said Tuesday it can quickly boost output by 25 percent if there is a sudden disruption in global supplies. Crude has jumped from $75 in October as traders worry a military conflict over Iran's nuclear program could cut that country's crude exports.

The European Union and the U.S. have imposed sanctions that make it tougher for Iran to sell its oil. In response, Iran has threatened to block oil shipments in the Strait of Hormuz, through which a fifth of world's oil supplies pass.

Kuwait said Tuesday it is increasing crude production and that Iran has assured its neighbors that it won't block the vital waterway.

"The Saudis have been cranking up output, presumably in an attempt to dampen further price increases," energy consultant and trader Ritterbusch and Associates said in a report. However, "increased output won't necessarily reduce the Iranian risk premium."

Saudi Arabia also said it wanted to "provide adequate supplies of petroleum, stabilize oil markets and return oil prices to fair levels" for producers and consumers.

"Saudi Arabia clearly fears a scenario like in 2008, when the oil price climbed to nearly $150 a barrel by midyear, causing the global economy to slide into recession and forcing the price down to $30 a barrel within a matter of months," said a report from Commerzbank in Frankfurt. "Whether the oil price will fall toward the $100 mark, as Saudi Arabia hopes, will depend mainly on whether words are followed by actions. Reports of an expansion of oil shipments to the U.S. could be an indication that this is the case."

In other energy trading, heating oil was up 0.03 cent at $3.2370 per gallon and gasoline futures lost 0.7 cent to $3.3506 per gallon. Natural gas fell 0.4 cent to $2.331 per 1,000 cubic feet.


Alex Kennedy in Singapore and Adam Schreck in Dubai contributed to this report.