Oil topped $71 a barrel on Wednesday for the first time in seven months on signs demand for crude could be recovering, with U.S. inventories falling by more-than-expected last week and the Department of Energy (DOE) raising its forecast for global demand.
The U.S. Energy Information Administration (EIA) -- the statistical arm of the DOE -- said on Wednesday U.S. crude stocks fell by 4.4 million barrels last week, against analysts expectations for a minimal 400,000 barrel draw.
The crude stock drawdown in the world's largest energy consumer added to a sense weak demand was bottoming after the EIA raised its 2009 demand forecast for the first time since September on Tuesday.
U.S. light crude for July delivery rose to a high of $71.79 a barrel before pulling back slightly to trade up $1.12 at $71.13 at 1500 GMT. London Brent crude gained 95 cents to $70.57 a barrel.
U.S. gasoline stocks also surprised analysts, falling by 1.6 million barrels last week when most had been expecting a slight build. Wholesale gasoline prices in the U.S. spiked above $2 a gallon for the first time since early October.
Some analysts predicted U.S. drivers -- consumers of around one in 10 barrels of oil globally -- will pay $3 a gallon at the pump by the time the summer driving season is over.
The 1.6 million barrel decline in gasoline supply... will shift some bullish focus back to gasoline with the RBOB futures likely taking over some upside leadership for a few days, said Jim Ritterbusch, President of Rittersbusch and Associates in Illinois.
Oil has more than doubled from the low $30s hit this winter as investors have started to price in expectations for an economic recovery which should boost oil demand.
Output cuts by the Organization of the Petroleum Exporting Countries (OPEC) totaling 4.2 million bpd since September have also helped prices to recover.
OPEC has complied with around 80 percent of its cuts, but analysts have cautioned this is likely to slip as prices rise.
Markets are pricing in the fact that high levels of global inventories are going to fall pretty fast in the third and fourth quarter if OPEC can maintain their current output levels, VTB Capital analyst Andrey Kryuchenkov in London said.
Kuwait's oil minister said on Wednesday the producer group -- responsible for more than a third of the world's crude output -- could raise production if oil prices rose toward $100 a barrel.
Economists have voiced concerns the rapid run-up in crude prices could derail any fragile economic recovery.
Gains in oil were capped by a rebound in the dollar on Wednesday, with the greenback recovering against the euro, trading at around $1.40 against the single currency.
Oil has been trading in the opposite direction to the dollar recently, as commodities priced in the greenback become cheaper when it weakens and more expensive when it strengthens.
Analysts said the next move in the dollar could decide whether the rally in oil prices continues.
(Additional reporting by Maryelle Demongeot and Felicia Loo in Singapore, Rebekah Kebede in New york; editing by James Jukwey)