Oil rises as supplies drop

NEW YORK (CNNMoney.com) -- Oil prices jumped Wednesday, after the weekly government energy inventory report showed supplies of crude fell more than analysts had expected.

What prices are doing: Crude prices soared $1.23 to settle at $82.93 a barrel on Wednesday.

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What's moving the market: Prices climbed, as the market responded to a spate of government reports on Wednesday.

The closely-watched inventory report from the Energy Information Administration showed mainly lower-than-expected inventories for the week ended Mar. 12.

The EIA reported that U.S. commercial crude oil inventories increased by 1 million barrels, below analyst estimates of 1.9 million barrels, according to a survey from research firm Platts.

Gasoline and distillate inventories fell by 1.7 million and 1.5 million barrels, respectively. According to Platts, analysts expected gas inventories to drop 1.5 million barrels and distillates to fall 1.6 million barrels.

Earlier in the day, The Department of Labor's Producer Price Index (PPI), a measure of wholesale inflation, fell more than expected in February, and core PPI, which excludes fuel prices, came in on par with analyst estimates.

This data supported the notion that inflation is under control for now, which the Fed hinted to on Tuesday in its decision to keep a benchmark interest rate unchanged, near zero.

What analysts are saying: "The Kool-Aid that has been offered, and apparently drunk by oil market participants, is that the recession is over and the long slog back to prosperity has begun," said Mike Fitzpatrick, vice president of MF Global, in a report.

The market has been rallying lately with the Dow (INDU) rising 0.44% to an 18-month high Wednesday.

Still, crude inventories continue to be about 4.2% lower than a year ago, according to the American Petroleum Institute's monthly report, which also showed that gasoline production and demand are at their highest levels since June 2005.

Historically low demand has compelled OPEC to keep quotas unchanged and has kept a lid on oil prices.

"Traders were trying to sell the market down, but it was hard to break the momentum," said Phil Flynn, senior market analyst for PFG Best.

Flynn says that the Fed's rate decision, positive PPI report, and stabilization in the Greek debt situation, combined for a perfect scenario for oil.

But he cautioned that pressure will continue to come from China, since policy decisions there will affect the dollar and crude prices in the near-term. "Today, the markets aren't worried about tomorrow," said Flynn.

Looking forward: Traders will be busy with a handful of important government reports, including the consumer price index and the jobs report, due out on Thursday.

April crude oil contracts will roll over on March 22.