Oil hovers near US$80

Oil rose to near US$80 per barrel after a government report showed U.S. crude oil stocks fell by more-than-expected last week and as the dollar weakened against a basket of other currencies.

The U.S. Energy Information Administration (EIA), the statistical arm of the Department of Energy, said crude stocks in the world's largest energy consumer fell by 900,000 barrels last week, against market expectations for a 300,000 barrel draw.

Gasoline and distillate stocks also fell, by 1.7 million and 300,000 barrels respectively.

"Overall, the figures were fairly bullish -- gasoline was a much larger draw than expected. That was the headline figure," said Mike Zarembski, senior commodities analyst at Optionsexpress in Chicago.

U.S. light crude oil futures for December delivery rose as high as $80.33 per barrel after closing at $79.14 on Tuesday. By 1604 GMT prices were up 75 cents on the day at $79.89 per barrel.

London Brent crude gained 82 cents to $79.79, trading just slightly below its 2009 high of $80.26 a barrel.

While U.S. crude stocks fell, the rise in prices was perhaps muted after an industry report had suggested on Tuesday that crude stocks had fallen by 4.4 million barrels last week due to disruptions caused by Tropical Storm Ida.

"The crude draw was as expected, (but) not nearly as bullish as the American Petroleum Institute," said Zarembski.

Traders were also watching the direction of the U.S. dollar. The dollar has fallen steadily for most of this year and hit a 15-month low this week, helping drive commodities higher as investors have sought hard assets to hedge against the depreciating currency.

Oil is priced in dollars on world markets and energy prices often move in the opposite direction to the U.S. currency.

"The market has picked up as the dollar has retrenched," said Harry Tchilinguirian, oil analyst at BNP Paribas.

"With oil trading (rightfully or wrongfully) inversely with the dollar and positively with equities, buying interest in oil, like other commodities has risen," BNP said in a statement.

BNP Paribas raised its average price forecast for U.S. crude in 2010 to $81 a barrel from $78 a barrel. It also raised its fourth quarter of 2009 forecast to $77 per barrel from $66.

TOO FAR? TOO FAST?

The United States is the world's biggest oil consumer and recession there over the past 18 months has helped keep a lid on global demand for fuel. Expectations of economic recovery have helped push oil prices higher this year but several analysts argue that the market may have moved too far too fast.

"Commodities, including oil, have seemed to defy gravity over the last few weeks, partly supported by the dollar, but also on a false assumption that economic recovery will lead to a further rise in prices," said Eugen Weinberg, head of commodity research at Commerzbank.

"That is probably wrong because the economic recovery is already reflected adequately in the current prices," he said.

Gold hit a record high of $1,149.15 an ounce in Europe on Wednesday, partly on the dip in the dollar.

Oil has rallied from below $33 last December even though global demand fell year-on-year for the first nine months of 2009, according to the International Energy Agency.