Oil reaches $112 for the first time

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NEW YORK (CNNMoney.com) -- Oil prices surged to record levels Wednesday, topping $112 a barrel, after a government report showed an unexpected decline in crude supplies.

U.S. crude for May delivery climbed $2.37 to settle at $110.87 a barrel on the New York Mercantile Exchange, a new closing record.

Oil also set a new intraday high of $112.21 earlier in the session. The previous intraday high of $111.80 was set March 17, while the previous closing high of $110.33 was set March 13.

In its weekly inventory report, the Energy Information Administration said crude stocks fell by 3.2 million barrels in the week ended April 4. Analysts had been expecting an increase of 2.4 million barrels, according to a Dow Jones poll.

The EIA said gasoline supplies fell by 3.4 million barrels. Analysts had only expected a drop of 2.3 million barrels. Distillates, used to make heating oil and diesel fuel, fell by 3.7 million barrels, more than the expected drop of 1.2 million barrels.

Record gas prices. The supply report comes on a day when average gasoline prices hit a new record high of $3.343 at the pump, according to AAA. Prices are up nearly 20% from what they were last year.

This was despite the fact that demand for gasoline was up just 0.3% compared to the same period last year, according to the EIA report. Gasoline demand usually grows at about 1.5% per year, but the slowing economy and rising prices have led consumers to cut back on driving.

Analysts said refiners are making less gas, and that's contributing to the pump price surge, especially as the warm weather driving season approaches.

Refineries are running at 83.1% capacity, according to the EIA. They should be running at 89% to 90% this time of year, said Mark Waggoner, president of Excel Futures, a California-based commodities trading firm.

"Oil companies need to ramp up ... fast," he said.

Weak dollar. Before the EIA issued its report, oil prices were already higher due to the dollar's slide against the euro Wednesday.

Many investors see commodities such as oil as an effective hedge against a falling dollar and inflation. Also, a weaker greenback makes oil cheaper to investors overseas.

Analysts attribute much of oil's rise this year to speculative buying tied to the falling dollar.

With the Federal Reserve expected to cut rates several more times this year, which will likely further weaken the dollar, oil prices may continue rising despite tepid demand.

- from staff and wire reports