Crude oil hit the record above $131 a barrel on Wednesday as crude inventories in the U.S. fell more than expected on the week ended May 16.

The U.S. Energy Department report showed crude oil inventories fell by 5.4 million barrels to 320.4 million barrels while analysts expected crude inventories to rise 900,000 barrels according to a Platts survey.

Crude futures for July were trading up $2.90 or 2.25 percent to $131.88 a barrel by 11:08 a.m. in the New York Mercantile Exchange. June contract which expired yesterday settled by $129.07 a barrel. This is the first time futures soar above $131 and are trading double its price from a year ago.

The July contract surpassed $130 a barrel for the first time during overnight electronic trading today.

On the report, distillate fuel stockpiles climbed 700,000 barrels at 107.8 million barrels, and gasoline supplies dropped 800,000 barrels to 209.4 million barrels, according to the Energy Department's report on Wednesday.

According to forecasts gasoline stockpiles were expected to increase 500,000 barrels and distillate inventories to be up 1.45 million barrels, a Platts survey showed.

Brent crude futures rose $2.52 or 2.01 percent to $128.18 a barrel in the London ICE Futures Exchange. Brent futures hit a record of$129.92 earlier.

Investors fear supplies are falling, demand increasing and the weak dollar is driving traders to buy crude as a hedge against inflation.

The focus for investors has switched to supplies and demand concerns. According to analysts, global demand has been raising faster than supplies. China is one of the countries that has increased its imports and is likely to continue importing strongly after the devastating earthquake on Shuang province and as the country approaches to host the 2008 Olympics. Also, demand for diesel useful for transport and power generation has also been increasing challenging refineries capacity.

Analysts from Goldman Sachs have projected oil prices will reach $141 a barrel in the second half of this year having an impact on prices. In addition, Societe Generale SA and Credit Suisse rose its forecasts for oil prices on Tuesday.

Meanwhile the Organization of Petroleum Exporting countries who produces 40 percent of global oil is not likely to increase output. OPEC's chief Abdalla Salem el-Badri said on Tuesday that there was no scarcity of oil in the market since international oil supplies were very high, a Venezuelan newspaper stated. On May 19, OPEC's president Chakib Khelil said the organization is not going to increase production and attributed high prices to speculators and the falling dollar.

Prices have been boosted by a sliding dollar. On Wednesday the dollar weakened 0.76 percent to $1.5756 per euro at 10:45 a.m. in New York compared with $1.5646 yesterday. A falling dollar increases demand for commodities as investors find to hedge the diminishing value of their money. Also a weak dollar makes commodities, traded in the currency like oil, cheaper for foreign investors