Oil jumps as U.S. fuel inventories fall

By Janet McBride and Alex Lawler

LONDON (Reuters) - Oil rose sharply on Wednesday after a U.S. government report showed a surprise drop in fuel inventories in the world's top consumer, renewing concern about supply in the midst of peak summer driving demand.

U.S. stockpiles of gasoline and distillates dropped unexpectedly last week as a slump in imports countered an increase in production from domestic refineries, the report showed.

"This is a bullish report, but it is even more bullish given the fact that many were looking for product inventories to move the other way," said Phil Flynn, analyst Alaron Trading in Chicago.

London Brent crude, currently seen as a better indicator of the global market than U.S. oil, was up 68 cents at $70.85 by 1610 GMT, after falling $1.19 on Tuesday. U.S. crude was up $1.06 at $68.83.

U.S. crude oil inventories rose slightly more than expected, keeping them at a fresh nine-year high, according to the report from the Energy Information Administration.

Oil was losing ground earlier in the session on expectations the weekly U.S. report would reveal a healthier picture of U.S. supply, coupled with losses in other commodity and financial markets.

Investors are showing signs of steering clear of higher-risk markets due to troubles with U.S. mortgage securities and concerns over the rising cost of borrowing.

MORE RESILIENT

Oil is proving better able to shrug off the risk aversion, investors said.

"The subprime issue is the big area of concern," said Tim Rees, a fund manager at Insight Investment. "Oil is falling, but it's been pretty resilient in comparison over the last few weeks."

Some analysts said the longer-term view remained bullish.

"A move downwards in the oil price looks unlikely until seasonally peaking refined product demand eases off," Citigroup analysts said in a research note.

The chief economist of the International Energy Agency, representing 26 consumer nations, said oil was unlikely to fall far from today's near record levels and any move in the longer term is more likely to be upward.

"I don't think oil prices will go down significantly. If there is any change in prices in the coming years it will be in the direction of an increase," Fatih Birol told reporters.