Oil rises to near $73 after U.S. crude stock drop

An employee fills a car with petrol at a gas station in Jammu July 1, 2009.

NEW YORK (Reuters) - Oil surged 2.8 percent to near $73 a barrel on Wednesday after data showed crude stocks in the United States fell more than expected last week, easing concerns about flagging demand.

Crude inventories declined by 3.7 million barrels in the week to December 11, according to the U.S. Energy Information Administration, eclipsing analyst forecasts for a more modest draw of 1.8 million barrels. <EIA/S>

Crude for January delivery settled up $1.97 a barrel at $72.66, after rising to as much as $73.55 a barrel earlier. London Brent crude rose $1.50 to $73.55 a barrel.

The unexpectedly large drop in U.S. crude stocks helped to narrow the discount of NYMEX crude to Europe's benchmark Brent. NYMEX barrels traded within 19 cents of Brent barrels on Wednesday, following discounts of more than $1.00 a barrel on every other trading day this month.

A 2.9-million-barrel draw in U.S. distillate stocks, which include heating oil and diesel, was almost five times bigger than the 600,000-barrel dip analysts expected, while gasoline stocks grew less than expected.

The data showed that part of a U.S. fuel surplus is being worked off after demand was battered this year by the recession.

"The best news here, in terms of market stabilization, is the big draw in distillates," said Brad Samples, analyst at Summit Energy in Louisville, Kentucky.

Oil rose for a second day after a nine-session rout in which prices plummeted 11.3 percent from levels above $78 a barrel on December 1. Analysts attributed the fall to persistently low fuel demand and rising U.S. crude inventories.

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Relationship between U.S. crude stocks and the oil price

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The U.S. Federal Reserve opted on Wednesday to hold interest rates near zero amid "subdued" inflation risks, and said rates should remain exceptionally low for an extended time to help spur an economic recovery.

Oil pared earlier gains following the afternoon Fed statement, as the U.S. dollar .DXY firmed to trade almost unchanged against a basket of foreign currencies, after weakening earlier. A slide in the dollar often pushes oil higher, making the commodity cheaper for holders of foreign currencies.

OPEC's No. 2 oil exporter Iran tested a long-range missile earlier Wednesday, with a reported range of 1,250 miles that would put Israel and U.S. military bases within striking distance. The test drew criticism from the U.S. and U.K governments, which are among Western powers considering new sanctions on Iran over its nuclear program.

The Organization of the Petroleum Exporting Countries (OPEC), whose daily production meets around a third of global crude demand, will convene in Angola to discuss output policy on December 22.

But few expect OPEC to scale back the 4.2 million barrels a day in production cuts the group has agreed upon since last year. Most members are comfortable with the current range of oil prices.

Oil has risen sharply since collapsing toward $32 a barrel at the peak of the financial crisis last December, but it's still a far cry from record prices above $147 a barrel reached in July 2008.

"Prices are back very close to the $75 price level that they (OPEC members) view as a sweet spot," said Chris Jarvis, senior analyst at Caprock Risk Management in New Hampshire.

The producer group said on Tuesday it sees the oil market staying weak until the second half of next year, as a recovery in oil demand is countered by a huge volume of excess supply amassed during the economic crisis.

(Additional reporting by David Sheppard in London, Edward McAllister, Eileen Moustakis and Robert Gibbons in New York and Jennifer Tan in Singapore; Editing by Christian Wiessner)