Oil Settles Above $80 on Drop in Crude Supply

Oil prices rose 1 percent on Wednesday, extending the previous session's gain, after a U.S. government report showed a surprise decline in crude stocks in the world's largest consumer.

The U.S. Energy Information Administration said in its report that crude stocks fell by 4 million barrels in the latest week. Analysts expected inventories would rise by 1.4 million barrels.

"On the surface it was a bullish surprise with a big draw in crude," said Mike Zarembski, senior commodities analyst for OptionsXpress.

U.S. light, sweet crude for December rose 80 cents to settle at $80.40, after settling up $1.47 on Tuesday.

London Brent crude settled up 78 cents at $78.89 a barrel.

The EIA report also showed an unexpected decline in gasoline stockpiles, which fell by 300,000 barrels. Distillates inventories fell by 400,000 barrels, less than the expected 1 million-barrel decline.

Oil also drew support from a weak dollar, which fell against a basket of currencies on Wednesday, helping to send gold to a record high. A weaker dollar makes commodities like oil cheaper for those holding other currencies.

Industry group the American Petroleum Institute said late on Tuesday that U.S. crude oil stocks fell 3.3 million barrels as imports dropped in the week to Oct. 30, versus expectations for a 1.4 million-barrel rise.

Gold hit a record high above $1,095 per ounce as the dollar weakened and after the International Monetary Fund's 200-tonne sale of gold to India's central bank enhanced sentiment towards the metal.

The U.S. Federal Reserve ends its two-day meeting on Wednesday and, while it is expected to keep rates unchanged, there is speculation it might drop or alter its pledge to keep rates low for an "extended period," even as signs of a recovery mount.

Analysts warned that oil prices could suffer losses if there are any signs in the Federal Reserve's statement that monetary policy is going to be squeezed.

"Not long ago a few words from Saddam Hussein could turn prices on their head. Now a few words from the Fed is all it needs," brokers PVM said in a research note on Wednesday. "If there is any hint of tightening, hang on to your hats. Few believe that the real economy has yet caught alight sufficiently to remove the oxygen."

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