Oil jumps nearly $5 on weak inventories

NEW YORK (CNNMoney.com) -- A weak government report on inventories helped fuel an oil rally Wednesday that was initially sparked by a decline in the dollar.

Light sweet crude for the delivery month of May settled at $105.90 a barrel, up $4.68 from Tuesday's closing price of $101.22 a barrel. Oil had been trading up about $2.36 a barrel just prior to the report's release Wednesday morning.

In electronic trading, the intra-day high was $106.20 a barrel, and the low was $101.43 a barrel Wednesday.

In its weekly inventory report, the Energy Information Administration said crude stocks remained unchanged last week. Analysts were looking for an increase of 1.7 million barrels according to a Dow Jones poll.

Gasoline supplies fell by 3.3 million barrels while distillates, used to make heating oil and diesel fuel, fell by 2.2 million barrels. Analysts had expected an 800,000 barrel drop in gasoline supplies and a 1.6 million decline in distillate stockpiles.

Oil prices started the day higher, driven by the weakening dollar.

The dollar continued its decline versus the euro Wednesday, a day after reports showed that consumer confidence had reached its lowest level in five years, and that home prices had fallen a record 11%.

Adding further fuel to the declining dollar was a disappointing read on manufacturing orders. Wednesday morning, the Commerce Department said that factory orders for big-ticket industrial items fell unexpectedly in February, with orders for machinery tumbling a record 13%.

Continuing weakness in U.S. currency over the past few weeks drove oil near an all-time trading high of $111.80 a barrel on March 17. Investors often use oil and other commodities as a hedge against inflation.

"We are now in a trading range between $100 and $110," said Stephen Schork, publisher of the oil industry newsletter Schork Report. Traders see no profit below $100, and the market begins to strain at $110, he said.

"As long as the dollar is going down, you're going to see rallies," added Mark Waggoner, president of Excel Futures.

"That $100 level is now becoming a support level that people are buying from," said Waggoner. He hopes oil can pull back to $98.36 a barrel - but that can only happen if the dollar regains strength.

Unlike the Federal Reserve, which has cut interest rates six times since September to jump-start the economy, European Central Bank president Jean-Claude Trichet said Wednesday there was no need to cut interest rates. As a result, inflation for the 15-nation euro is in check, bolstering the currency's strength.

April heating oil futures jumped 11.9 cents to settle at $3.0438 a gallon, and April gasoline futures rose 6.27 cents to settle at $2.7429 a gallon. April natural gas futures rose 15.3 cents to settle at $9.572 per 1,000 cubic feet.

In London, May Brent crude rose $3.39 to settle at $103.99 a barrel on the ICE Futures exchange.