NEW YORK (CNNMoney.com) -- Oil prices rallied Wednesday after a government report showed an unexpected drop in inventories.
U.S. light crude for December delivery settled up $1.83 to $87.10 a barrel on the New York Mercantile Exchange. Oil traded down 22 cents to $85.05 just prior to the report's release, then rose as high as $87.20 before pulling back a little.
In its weekly inventory report, the Energy Information Administration said crude stocks plunged by 5.3 million barrels last week. Analysts were looking for an increase of 300,000 barrels, according to a Dow Jones poll.
"Crude should have been able to maintain a more modest decline, if not some growth," said John Kilduff, an energy analyst at MF Global in New York. "Now there are renewed worries over supplies."
Gasoline supplies fell by 2 million barrels while distillates, used to make heating oil and diesel fuel, slipped by 1.8 million barrels. Analysts were expected gasoline stockpiles to grow by 1.1 million and distillates to rise by 200,000.
"Distillates and gasoline supplies compared to last year are down significantly," Antoine Halff, head of energy research at Fimat in New York.
Refinery activity fell last week by 0.2 percentage point to 87.1 percent of capacity. Analysts had expected refinery utilization to grow by 0.3 percentage point.
Oil prices have more than quadrupled since 2002. Analysts say surging global demand combined with limited new supply is the main underlying factor.
The surge in prices has also attracted lots of speculative investment money, further driving prices higher. And the tight supply and demand situation magnifies the effect geopolitical tensions have on prices, as there is less spare supply available globally to cover a disruption from key exporters such as Iran, Nigeria or Venezuela.
Last week, oil prices hit a record trading high of $90.07, but prices retreated. However, the drop in inventories Wednesday spurred a rise in prices.
"I don't know if we'll reach $90 today but we are only a few dollars away," Kilduff said. "We're in the process of retaking the $90 mark over the next few sessions, which is in line with our predictions of oil hitting $100 a barrel before the end of the year."
The falling U.S. dollar has also played a role, as oil worldwide is priced in dollars.
Oil producing nations have less incentive to ramp up output if the buying power they receive per barrel is declining, and foreign consumers have less incentive to reduce demand if oil is, relatively, getting cheaper for them.
At the pump, gas prices were largely unchanged overnight to a national average of $2.822 a gallon, according to AAA. Last year at this time, regular gasoline was $2.20 a gallon.
"A rise in retail gas prices has some support," Fimat's Halff said. "We have very low gasoline stocks and they've rebuilt somewhat, but from an extremely low base."
Gas prices are still higher than they were a year ago because they have been pushed up by a growth in demand.
"Inventory levels are extremely low. It started last spring when refineries were in maintenance," Halff said. "This is kind of an inheritance from earlier this year." 
