NEW YORK: Oil prices rallied 3 percent on Wednesday as US crude oil inventories fell for the first time in seven weeks and the dollar weakened further, fueling investor appetite for riskier assets.
The oil rally extended gains for a second day and both Brent and US crude prices were racing back up toward 2011 highs.
ICE Brent crude for June delivery rose $2.74 to $124.07 a barrel by 12:10 p.m. EDT (1610 GMT) after surging to an intraday high of $124.23. Brent hit a 32-month high above $127 a barrel on April 11, but concerns about high prices stifling fuel demand had since cut them back.
US June crude gained $3.25 to 111.53, just below its session high of $111.66.
US crude inventories fell 2.32 million barrels last week, bucking average analyst forecasts in a Reuters poll for a a 1.1 million barrel increase. It was the first drawdown since the week to Feb. 25,
The drawdown was prompted by a big drop in imports and a steep climb in refinery utilization as US refineries ended spring season maintenance.
Drawdowns in gasoline stocks for the ninth week in a row and and a decline in distillate supplies for a second straight week added to a tightening of petroleum stockpiles in the world's largest oil consumer.
"The inventory trend has been very bullish for the last 10 weeks. And this is partly supporting the strength in crude pricdes outside geopolitics," said Mark Kellstrom, senior analyst at Strategic Energy Research and Capital in Summit, New Jersey.
WEAKER DOLLAR SPURS COMMODITY BUYING
Oil's rise on a weaker dollar was part of a commodities buying binge, with gold setting a record above $1,500 an ounce, as persistent worries about US fiscal health drove investors to seek alternative assets.
"Oil is up there with gold as an inflation hedge for investors," said Mike Zarembski, senior commodities analyst at optionsXpresss in Chicago.
At the same time, "everyone is still afraid to be short with the situation in the Middle East," Zarembski said.
The dollar index, which measures the greenback against a basket of currencies, was down 0.85 percent. A weaker US currency can support dollar-denominated commodities by making them cheaper for holds of other currencies.
"The dollar index has broken significantly below a long-term multi-year trendline, so we could see the selling accelerate," said GFT market strategist David Morrison.
HIGHER OPEC OUTPUT?
The International Energy Agency's executive director, Nobuo Tanaka, issued the latest warning that high oil prices could reduce demand in top consumers the United States and China.
OPEC needs to boost output in June or July to douse further price rises, Tanaka said, adding that if crude prices stayed at $100 a barrel or more for the rest of 2011, the market could see demand destruction similar to that of 2008.
But OPEC itself sees oil prices between $80 and $90 as "adequate" and has no plans for an emergency meeting because the market is well supplied, Ecuador's Oil Minister, Wilson Pastor, told Reuters in an interview.
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