[NEW YORK] Oil prices rallied on Wednesday after US inventory data showed a larger drop in crude supplies than many analysts had expected.

US benchmark West Texas Intermediate for February delivery rose US$1.36, or about 3.8 per cent, to US$37.50 a barrel.

In London, European benchmark Brent oil for February delivery advanced US$1.25 to US$37.36 a barrel.

The gains came after the US Department of Energy reported that US crude inventories fell 5.9 million barrels for the week ending December 18. The report also showed US oil imports fell about 13 per cent from the prior week.

Other aspects of the report were less favorable towards addressing a supply glut that has badly hit oil prices over the last year. Domestic production of oil rose slightly and inventories at a closely-watched trading hub in Cushing, Oklahoma increased.

Still, the report was enough to lift oil from multi-year lows.

"The main thing is after the long sell off, the inventory report today has encouraged people to buy into the market and to think this may be a bottom," said Michael Lynch of the consultancy Strategic Energy & Economic Research.

Citi Futures analyst Tim Evans said the drop in oil supplies, while unexpected, fell into a historic pattern of companies reducing their holdings for tax purposes.

"This looks very much like the typical end-of-year storage play, with Gulf Coast refiners slashing inventories to mitigate state ad valorem taxes on year-end crude stocks," Evans said.

For the second day in a row, US benchmark WTI closed above its European counterpart.

Analysts said the gain in the US contract could be the result of enactment last week of a US law lifting a 40-year ban on US crude exports. The move creates new markets for US suppliers and could stiffen competition for Brent in some markets such as Thailand and South America, said Andy Lipow of the Houston consultancy Lipow Oil Associates.

AFP