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Oil up above $109 on signs of strong US demand

business Updated: Apr 20, 2011 18:48 IST

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Oil prices rose above $109 a barrel on Wednesday after a report showed US gasoline supplies fell for a second week, suggesting higher fuel costs haven't yet curbed demand.

A weaker dollar which makes oil cheaper for investors holding other currencies and rising equity markets in Asia and Europe also helped boost oil markets.

By early afternoon in Europe, benchmark crude for June delivery was up $1.32 at $109.60 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 59 cents to settle at $108.28 on Tuesday.

In London, Brent crude for June delivery was up $1.42 to $122.75 a barrel on the ICE Futures exchange.

The American Petroleum Institute said late Tuesday that gasoline inventories fell 1.8 million barrels last week, following a plunge of 7 million barrels the previous week. The API also said crude supplies rose 667,000 barrels while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had forecast an increase of 1.6 million barrels.

The Energy Department's Energy Information Administration reports its weekly supply data — the market benchmark — later on Wednesday.

Traders have been watching closely for signs that the 29% jump in oil prices since mid-February will undermine demand, but strong consumption numbers from the U.S. and China suggest that it hasn't yet.

"There is little in the way of solid evidence that oil demand growth has slowed down from the unsustainably high pace of growth seen in 2010," Barclays Capital said in a report.

Some Asian analysts expect higher fuel costs to quicken inflation and lead central bankers in the region to boost lending rates. China, South Korea and Thailand are likely to raise rates the most while oil price subsidies should lessen the impact of higher global energy costs in Indonesia, Malaysia and India, Credit Suisse said in a report.

"The oil price shock will encourage a more hawkish monetary policy stance in the short term than would otherwise have been the case," Credit Suisse said. "Fiscal policy on the other hand will probably be somewhat more stimulative as governments attempt to shield the lowest paid from the harshest effects of the commodity price surge."

In other Nymex trading in May contracts, heating oil rose 3.24 cents to $3.1909 a gallon and gasoline gained 2.93 cents at $3.2624 a gallon. Natural gas futures were up 4.4 cents at $4.306 per 1,000 cubic feet.