Oil rises above $97 after US crude supply drop

Oil prices rose to above $97 a barrel Thursday as a report showed U.S. crude supplies fell more than expected for a second week, suggesting demand is improving.

By early afternoon in Europe, benchmark oil for August delivery was up 64 cents to $97.29 a barrel in electronic trading on the New York Mercantile Exchange. Crude lost 24 cents to settle at $96.65 on Wednesday.

In London, Brent crude rose 91 cents to $114.53 per barrel on the ICE Futures exchange.

The American Petroleum Institute said late Wednesday that crude inventories fell 3.2 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted a drop of 2.5 million barrels.

Inventories of gasoline dropped 1.9 million barrels last week while distillates decreased 1.6 million barrels, the API said.

"Whereas the decline in crude stocks can be explained by lower imports, the decline in oil products suggests a rise in demand," said a report from Commerzbank in Frankfurt.

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

Some analysts said falling U.S. supplies will likely spark crude producers to boost output, cutting into extra production capacity and supporting prices.

"We expect inventory draws will prompt OPEC to increase production, at the expense of spare capacity," Morgan Stanley said in a report. "We remain bullish oil, particularly in the second half."

Goldman Sachs recommended investors buy the Brent December 2012 contract as global demand outpaces production.

"We expect that the market will continue to tighten to critical levels by 2012, pushing oil pricessubstantially higher to restrain demand," Goldman said in a report.

Traders will also be closely watching U.S. June jobs data scheduled to be released Friday.

In other Nymex trading in August contracts, heating oil rose 2.38 cents to $2.9871 a gallon while gasoline gained 2.13 cents at $3.0189 a gallon. Natural gas futures added 0.7 cent at $4.224 per 1,000 cubic feet.

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Alex Kennedy in Singapore contributed to this report.