NEW YORK (CNNMoney.com) -- Oil prices extended early gains Wednesday after a government report showing drops in crude and gasoline supplies overshadowed fears of a slowing economy.
U.S. light crude settled $1.78 higher to $73.51 a barrel on the New York Mercantile Exchange. Oil had traded up 72 cents just prior to the report's release.
In its weekly inventory report, the federal Energy Information Administration said crude stocks tumbled 3.5 million barrels last week. Analysts were looking for a drop of 800,000 barrels, according to Reuters.
Gasoline supplies slid 3.6 million barrels versus forecasts for a drop of 1.7 million barrels while stockpiles of distillates used to make heating oil and diesel fuel rose 900,000 barrels, just shy of the expected 1 million-barrel gain.
EIA also noted that gasoline supplies are at their lowest level ever, when taking into account the level of demand.
The agency expects gasoline demand to average 9.65 million barrels a day, so supplies will be able to meet only 20 days of fuel use.
The low gasoline inventories will not likely cause a sharp spike in retail fuel prices, but will limit the usual decline in pump costs seen after this weekend's Labor Day holiday, the EIA said.
Oil prices hit a record trading high of $78.77 on Aug. 1, but have since retreated as traders fear fallout from the subprime mortgage sector will slow the global economy and sap demand for crude.
On Tuesday, turmoil in the stock and housing markets caused the biggest drop in consumer confidence in almost two years, adding to fears the global economy will falter. A separate report said home prices nationwide fell for the 12th straight month.
OPEC, under pressure to increase crude oil production as supplies fall in developed countries, said Tuesday the turbulence in the stock and housing markets is making the overall economic picture difficult to read.
OPEC officials have steadfastly insisted the world market is amply supplied with crude and that refinery bottlenecks are mostly to blame for tightness in gasoline supplies.
The group's secretary-general, Abdullah al-Badri, repeated that message on Tuesday, suggesting the 12-member exporter group would hold output steady when it meets on Sept. 11 in Vienna, Reuters reported.
But Badri said the U.S. subprime mortgage meltdown has made it tougher for OPEC to chart oil policy by clouding the picture on demand growth. "The situation in the past couple of weeks has become a lot more serious," he told Reuters.
-from staff and wire reports 
