Oil jumps $4 as supplies fall

Oil prices jumped Wednesday after U.S. inventories dropped for a fourth straight week.

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NEW YORK (CNNMoney.com) -- Oil prices rose more than $4 Wednesday after the government reported a surprise decline in crude oil and heating fuel supplies.

U.S. light crude for January delivery soared $4.37 to settle at $94.39 a barrel on the New York Mercantile Exchange. Oil had traded up $1.63 just prior to the report's release.

In its weekly inventory report, the Energy Information Administration said crude stocks fell by 700,000 barrels last week, marking the fourth straight week of declines. Analysts were looking for an increase of 100,000 barrels, according to a Dow Jones poll.

Distillate stockpiles, which are used to make heating oil and diesel fuel, fell by 800,000 barrels. Gasoline supplies rose by 1.6 million barrels. Analysts were looking for a 300,000 barrel increase in distillates and a 1.2 million barrel gain in gasoline stockpiles.

"It got the eye back on the ball in terms of the fundamentals being supportive," said John Kilduff, an energy analyst at MF Global in New York.

The drop in crude stocks came as a surprise, especially after last week's big decline. Traders attributed the 8 million barrel drop last week to fog in the Gulf of Mexico, which stranded ships carrying crude supplies. But they expected those ships to come in and boost supplies this week.

Demand numbers in the report were also fairly strong. EIA said total oil products supplied over the last four weeks was 1.4 percent higher than last year. Several recent reports have showed demand growth at under 1 percent, with a few even showing demand flat.

After hitting an all-time trading high of $99.29 last month, oil prices retreated and have been hovering around $90 for the last few weeks.

Oil prices rose more than $2 Tuesday as a winter storm in the U.S. Midwest shut crucial oil pipelines into and out of Cushing, Okla, the storage hub for oil traded on the NYMEX. Over 20,000 barrels of oil spilled while a tanker was loading in the North Sea, which also pushed prices higher.

But prices retreated from earlier highs after most of the pipelines came back online by the end of the day.

Traders also struggled with the Federal Reserve decision Tuesday cut its key short-term interest rate by just a quarter of a percentage point to 4.25 percent. Oil prices, along with stocks on the New York Stock Exchange, fell after the report as traders were hoping for a more aggressive cut, which could have spurred economic growth in the U.S. and sent the dollar lower.

A weaker greenback usually supports the price of oil - which is traded in dollars worldwide - since it makes oil relatively cheaper for foreigners and encourages them to use more of it. At the same time, it discourages OPEC countries from raising production, since they need to maintain high oil prices to offset the effects of a falling dollar.

But Kilduff said the Fed's decision was being rethought Wednesday in a way more favorable to economic growth.

"The Fed is putting the sizzle back in all the markets," he said.

Oil has more than quadrupled since 2002, when it traded at $20 a barrel. Most analysts blame the price surge to limited supplies, which can't keep up with rising demand. The boom has also attracted a slew of investment money and magnified the impact of a potential supply disruption from war or natural disaster.