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NEW YORK (CNNMoney.com) -- Oil prices shot up more than $5 on Wednesday, erasing most of the losses that crude posted earlier in the week and leading some analysts to wonder when oil's dramatic doubling from last year's price levels will end.

The market is in "overreaction mode," said Dan Flynn, a market analyst at Alaron Trading in Chicago. "For every one headline we get to bring the market down, we get two headlines that bring it back up."

Light, sweet crude for July delivery rose $5.07 to settle at $136.38 a barrel on the New York Mercantile Exchange. The contract surged nearly $11 on Friday to set an all-time high of $139.12 before giving up more than $7 earlier this week.

Oil has set three single-day gains of more than $5 in the span of a week. Wednesday's rise was the third-largest on record, trailing record-setting gains on June 5 and June 6. Crude is now trading at more than double last year's levels, when it traded at just $65.97 a barrel.

Bullish inventory report

Crude prices soared as supply concerns mounted. In its weekly inventory report, the U.S. Energy Information Administration said crude supplies fell by 4.6 million barrels last week. Analysts were looking for a drop of 1.4 million barrels, according to a poll by energy research firm Platts.

The decline in crude oil supplies was "wildly bullish," said Flynn. But that sentiment was tempered by a "very bearish" 2.3 million barrel increase in supplies of distillates, which are used to make heating oil and diesel fuel, he said.

The EIA report also showed a 1 million barrel increase in gasoline supplies that was roughly in line with analysts' expectations. Demand for gas fell 1.3% versus the same period last year.

Weak dollar

A softening of the U.S. dollar also contributed to the rise in crude prices Wednesday. The euro bought $1.5566, up from $1.5449 Tuesday.

When the dollar falls, many investors buy oil and other commodities as a hedge against inflation. The greenback's retreat also makes dollar-denominated commodities more appealing to overseas investors.

Geopolitical concerns have also pressured the market recently, Flynn said.

Gas prices hit record

Separately, retail gas prices rose nine-tenths of a cent to a fourth straight record of $4.052, according to AAA. The price of diesel fuel rose seven-tenths of a cent to an all-time high of $4.792 a gallon.