Oil roars to record over $112 on U.S. inventory drop

By Matthew Robinson

NEW YORK (Reuters) - Oil surged to a record high over $112 a barrel on Wednesday after a government report showed a sharp drop in U.S. inventories ahead of the summer driving season.

U.S. crude settled up $2.37 at $110.87 a barrel after peaking at $112.21 and eclipsing the previous record of $111.80 hit March 17. London Brent settled $2.13 higher at $108.47 a barrel after hitting an all-time high of $109.50.

U.S. crude stockpiles fell 3.2 million barrels last week as imports declined, countering analyst expectations for a build, while gasoline and distillate inventories also tumbled, the U.S. Energy Information Administration reported.

U.S. gasoline and heating oil futures as well as London gas oil also hit record highs after concern about diesel supplies amid strong European and Asian demand supported crude earlier this week.

"This is a perfect storm for the energy markets, with records hit all around," said Phil Flynn, analyst at Alaron Trading in Chicago.

"But distillates are taking the center stage here because of tightness of supply of diesel and with a cold winter and the recent refinery fire in Finland." he added.

Further strength came from weakness in the dollar, which fell against the euro and the yen on views the U.S. Federal Reserve could cut interest rates by a 50 basis points this month amid worries of a possibly severe U.S. economic downturn.

The weak dollar has helped boost prices for commodities denominated in the greenback by boosting non-U.S. spending power and by luring investors seeking an inflation hedge.