Watch CBSN Live

Oil rises above $85 after U.S. crude supply drop

(AP) The price of oil rose above $85 a barrel Wednesday, buoyed by a broad rise in global financial markets and a report showing U.S. crude supplies fell more than expected last week, suggesting demand may be improving.

By early afternoon in Europe, benchmark oil for July delivery was up $1.13 to $85.42 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 31 cents to settle at $84.29 in New York on Tuesday.

In London, Brent crude for July delivery was up $1.41 at $100.25 per barrel on the ICE Futures exchange.

"A slight brightening of sentiment on the financial markets and a weaker U.S. dollar are putting wind in the sails of oil prices," said analysts at Commerzbank in Frankfurt. The fall in the dollar makes crude cheaper for traders using other currencies.

Prices were also buoyed since late Tuesday, when the American Petroleum Institute said that crude inventories fell 1.8 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted a drop of 1 million barrels. Inventories of gasoline rose 1.4 million barrels last week while distillates increased 1.8 million barrels, the API said.

The Energy Department's Energy Information Administration reports its weekly supply data - the market benchmark - later Wednesday.

Crude has sunk from $106 last month amid signs of weakening economic growth and oil demand in Europe, the U.S. and China. A dismal U.S. jobs report last week has investors worried the world's biggest economy is faltering just as Europe's debt crisis threatens to send the continent into recession.

J.P. Morgan recently cut its U.S. economic growth forecast for the 2012 to 2.2 percent and expects crude demand to be flat the rest of the year from a year earlier.

"With the U.S. economic forecast now moving lower, flags are being raised not only in Europe and Asia, but also in the U.S.," J.P. Morgan said in a report.

Traders will closely watch a European Central Bank policy meeting later Wednesday and congressional testimony from U.S. Federal Reserve Chairman Ben Bernanke on Thursday.

Oil prices were also boosted by the weaker dollar. On Wednesday, increased risk appetite among investors helped the euro rise to $1.2506 from $1.2446 late Tuesday in New York.

In other energy trading, heating oil was up 3.46 cents at $2.6682 per gallon and gasoline futures gained 2.47 cents to $2.7094 per gallon. Natural gas fell 2.2 cents to $2.424 per 1,000 cubic feet.

View CBS News In