U.S. oil hit a record over $95 a barrel on Wednesday, posting the biggest gain in 10 months after a steep drop in U.S. inventories fueled winter supply concerns and the U.S. Federal Reserve cut interest rates.
U.S. oil rose $4.90, more than 5 percent, to $95.28 a barrel in late electronic trading after settling at $94.53 earlier. London Brent settled up $3.19 at $90.63 a barrel.
U.S. crude oil stocks fell 3.9 million barrels in the week to October 26, government data showed, countering expectations for a build ahead of the Northern Hemisphere winter.
The draw was led by a huge tumble in stockpiles at the Cushing, Oklahoma, delivery point for the NYMEX oil contract as companies drained storage tanks.
Given the economics of what it takes to store oil, it makes no sense to hold on to inventory right now, said Stephen Schork, president of The Schork Report. Storage owners are taking the economically prudent step and dumping inventories.
Retail heating oil prices in top oil consumer the United States shot to a record $2.95 a gallon last week on the winter supply worries.
Further price support came as the dollar plummeted to a record low against the euro. The weak greenback has boosted many dollar-denominated commodities in recent weeks.
Oil roared higher ahead of the Fed's decision to lower benchmark costs by a quarter of a percent on Wednesday to bolster the world's biggest economy against the threat of the growing credit crisis.
The energy markets had assumed a quarter percentage point interest rate cut by the Fed, but there were still some that expected the cut to be half a percentage point, said Tom Knight of Truman Arnold.
While there may be some selling, I expect crude prices to firm here, after a $4 rise.
Despite the battered housing sector, the U.S. economy grew at a surprisingly brisk clip in the third quarter boosted by strong consumer spending and brisk exports, the government said on Wednesday.
In addition, the U.S. economy was holding up against high oil prices, the White House said on Wednesday.
The American economy is resilient and it's able to shrug off higher oil prices primarily through gains in productivity growth and through expansions into other sectors, White House economic adviser Edward Lazear said.
Rate cuts by the Fed have added liquidity to financial markets by making it cheaper to borrow. Analysts say some of the extra cash has been drawn to energy markets and contributed to oil's record rally.
The price increase has spurred U.S. government officials to call on OPEC to increase output, but cartel officials maintain speculator buying has driven up prices, not a supply shortage.
OPEC is not very happy with the existing situation that shows a lack of stability in world oil markets, Javad Yarjani, head of OPEC affairs at Iran's Oil Ministry, was quoted as saying.
He warned that geopolitical concerns had created a bubble in oil prices which would burst one day.
(Additional reporting by Santosh Menon and Elena Moya in London)