Oil prices spike 2% on stronger demand

By Chavon Sutton, staff reporter

NEW YORK (CNNMoney.com) -- Oil prices rose for the first time in more than a week Wednesday after a government report showing a decline in crude oil supplies fueled hopes that demand may finally be catching up to the economic recovery.

What prices are doing: Crude prices for May delivery soared $1.90, or 2.2%, to settle at $85.95 a barrel.

For more commodities prices, click chart.

Prices had declined over the past five trading sessions amid concerns about weak global demand and oversupply.

What's moving the market: Oil prices were pushed higher by the first decline in crude supplies in 10 weeks, as well as by positive economic data.

The U.S. Energy Department's weekly crude inventory report Wednesday showed a 2.2 million barrel drop in crude oil inventories for the week ended April 9. Analysts had forecast a 1.6 million barrel rise in inventories, according to research firm Platts.

Gasoline supplies were down 1.1 million barrels. That was a smaller decline than 1.3 million barrel dip analysts expected. Conversely, distillate stocks rose by 1.1 million barrels.

Better-than-expected retail sales and a weaker dollar, coupled with a report on consumer prices that met economists' expectations, also helped to bolster prices.

A weaker dollar makes crude prices, which are denominated in the U.S. currency, cheaper for foreign investors. That tends to bolster demand and prices.

What analysts are saying: "We're trading on supply and demand," said James Cordier, president of Liberty Trading Group. He said he had expected at least a $1 jump in crude prices if inventories showed a decline.

For weeks, crude stocks had been growing, raising fears that demand would not catch up to improving signs of recovery in the United States, which is the world's largest energy consumer.

However, there is concern that oil prices are still too high, given historically low demand. On Tuesday, The International Energy Agency, an influential energy advisor to 28 countries including the United States, said that crude prices above $80 a barrel could stunt the economic recovery.

Cordier says that prices will remain in a range of $82 to $88 a barrel until traders see sustained demand.

"It's hard to justify high prices when we have so much (oil) in storage," said Cordier. "Oil's going to have a hard time rallying" if drawdowns on crude stocks don't continue.

Looking ahead: A spate of economic reports are due out this week. Of particular interest to oil traders will be the initial jobless claims report on Thursday.

Positive jobs news could shore up confidence that a rebound in oil demand is underway. This could send crude prices higher.  To top of page

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