Oil peaks above $77 before retreating in Europe as US crude supplies drop more than expected

Oil rises above $77 after US crude supply drop

Oil prices hit a three-week high above $77 a barrel Thursday before surrendering most of its gains as a larger than expected drop in U.S. crude supplies fueled investor optimism that consumer demand is improving.

By early afternoon in Europe, benchmark crude for February delivery was up 21 cents to $76.88 in electronic trading on the New York Mercantile Exchange amid light volume, Christmas Eve holiday trading. Earlier in the session, it peaked at $77.48, its highest price since Dec. 4.

The contract rose $2.27 to settle at $76.67 on Wednesday after the Energy Department’s Energy Information Administration said U.S. crude inventories fell 4.9 million barrels. Analysts had expected a drop of 2.0 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Distillates stocks also declined by a higher-than-expected 3.1 million barrels, while gasoline supplies fell by 900,000 barrels.

Oil prices also received support from a slightly weaker dollar, which makes oil priced in the U.S. currency cheaper for investors holding euros and other notes. On Thursday, the euro rose to $1.4355 from $1.4337 late Wednesday in New York, while the British pound rose to $1.5965 from $1.5953 and the dollar dropped to 91.58 Japanese yen from 91.68 yen.

Crude has jumped from $69 a barrel last week on investor expectations that global crude demand, especially from Asia, will rebound next year and help boost prices. Oil prices have more than doubled from a year ago, and most analysts are forecasting crude will average between $75 and $85 in 2010.

In other Nymex trading in January contracts, heating oil fell 0.05 cent to $2.0113 while gasoline lost 0.62 cent to $1.9604. Natural gas jumped 5.1 cents to $5.872 per 1,000 cubic feet.

In London, Brent crude for February delivery fell 22 cents to $75.23 on the ICE Futures exchange.

Associated Press writer Alex Kennedy in Singapore contributed to this report.