Oil rallies $3 a barrel

By Ben Rooney, staff reporter


NEW YORK (CNNMoney) -- Oil prices jumped more than $3 Wednesday, to above $111 a barrel, as the dollar weakened and a government report said U.S. crude supplies fell last week.

Crude oil futures for June delivery, which became the active contract Tuesday, settled up $3.17 at $111.45 a barrel. Earlier, oil prices hit a session high of $111.66 a barrel.

After powering above $100 a barrel earlier this year, oil prices have been trading at the highest levels since 2008.

In its weekly inventory report, the Energy Department said U.S. oil supplies fell by 2.3 million barrels in the week ended April 15. Analysts were expecting an increase of 1.6 million barrels, according to a survey by energy research firm Platts.

Gas supplies fell by 1.6 million barrels, which was a smaller drop than expected. Supplies of distillates, used to make jet fuel, decreased by 2.5 million barrels. Analysts had forecast an increase in distillate supplies.

"The inventory numbers caught people by surprise," said Phil Flynn, senior market analyst at PFG Best, adding that oil refiners are ramping up production of gasoline ahead of the summer driving season. "But this comes against a backdrop of the weaker dollar."

The dollar fell over 1% versus the euro and was down sharply against the U.K. pound and Japanese yen.

A weaker dollar tends to support prices for crude oil and other commodities that are priced in the U.S. currency.

The dollar has come under pressure recently as central banks in Europe and Asia have increased interest rates, while the Federal Reserve is expected to maintain its easy money policies for some time.

The different approaches to monetary policy could set the stage for a period of prolonged dollar weakness, traders said, since it would revive the so-called carry trade.

The carry trade is when investors use the currency of a country with low interest rates to fund investments in countries with higher rates. It tends to push the target currency, in this case the dollar, lower in the market.

The dollar has been hurt by concerns about the U.S. deficit after Standard & Poor's said Monday that there is a one-in-three chance the nation's long-term credit rating could be cut within the next two years.

In addition, oil prices have been driven higher this year as crude exports from Libya have been curtailed by the ongoing violence there and political instability in the Middle East continues to accelerate.

The surge in oil prices this year has hit drivers where it hurts, with gas prices nationwide rising near record levels.

Motorist group AAA reported Wednesday that the national average price for a gallon of regular gasoline now stands at $3.837. That was up 0.2 cent from the day before, and was the 29th consecutive daily increase.

Over those days, gas prices have increased 29 cents, or about 8%. While prices are still below the all-time high of $4.114 a gallon, many analysts expect gas prices to continue rising as driving demand picks up for the summer. To top of page

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