Oil Near $111 After Surging to Record on U.S. Inventory Dip

Oil prices steadied near $111 a barrel Thursday after jumping to a new record in the previous session on an unexpected drop in U.S. crude inventories.

The U.S. Energy Information Administration's inventory report, closely watched by the market, showed Wednesday that crude stocks fell 3.2 million barrels last week.

"The crude inventory draw was a big surprise to the market, which had actually expected an increase of 2 to 3 million barrels. It was a substantial drawdown," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Analysts surveyed by Dow Jones Newswires had expected, on average, an increase of 2.4 million barrels.

The decline in crude stockpiles pushed light, sweet crude for May delivery up $2.37 to settle at a record $110.87 a barrel on the New York Mercantile Exchange on Wednesday. It rose as high as $112.21 a barrel during the floor session, surpassing the previous trading record of $111.80 set last month.

On Thursday, the contract fell 9 cents to $110.78 a barrel in Asian electronic trading by midafternoon in Singapore.

Some analysts cautioned against reading too much into last week's drop in crude supplies, noting a sharp drop in imports over the same period.

"Imports have been somewhat erratic, I would say this one week's result is not a trend," Shum said. "It might be compensated by a large import next week."

The EIA also said gasoline and distillate supplies — which include diesel fuel and heating oil — fell more than expected last week, although analysts said gasoline inventory levels remained healthy.

"Gasoline inventories are higher than the historical average at this time of the year, and gasoline fundamentals are actually weakening in the U.S., so there is really no need to worry about supply being too tight," Shum said.

Analysts expect demand for gasoline and oil to fall further as prices rise. Theoretically, that should bring prices down. But so far this year, prices have shown little inclination to fall in response to eroding demand. With gasoline supplies shrinking and the Northern Hemisphere summer approaching — when demand, while weaker than last year, will be stronger than it is now — consumers may have to wait until later in the year for price relief.

Also supporting oil prices was the release of a gloomy report by the International Monetary Fund Wednesday that said the U.S. is headed for a recession, dragging world economic growth down along with it.

The IMF slashed growth projections for the United States — the epicenter of the woes — and for the world economy. Its sobering new forecast underscored the damage inflicted from the U.S. housing and credit debacles.

"Normally with bearish economic data you would see oil pricing drop, but these days the trading relationship is: bad economic news means bullish movements in oil," Shum said.

Financial market interprets grim news as indications that the U.S. Federal Reserve will further cut interest rates, which would drive the U.S. dollar down, he said. A weaker dollar attracts financial investors to oil and other commodities as a hedge against inflation.

In other Nymex trading, heating oil futures fell 0.85 cent to $3.226 a gallon while gasoline prices added 0.37 cent to $2.7779 a gallon. Natural gas futures rose 10.4 cents to $10.16 per 1,000 cubic feet.

Brent crude fell 4 cents to $108.43 a barrel on the ICE Futures Exchange in London.