Oil rises above $99 after US crude supply drop

By early afternoon in Europe, benchmark crude for March delivery was up 90 cents at $99.31 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.50 to settle at $98.41 on Tuesday.

In London, Brent crude rose 42 cents to $116.65 a barrel on the ICE Futures exchange.

The American Petroleum Institute said late Tuesday that crude inventories fell 4.5 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 2.3 million barrels.

Inventories of gasoline added 4.4 million barrels last week while distillates rose 386,000 barrels, the API said.

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

Analysts said the large reduction in oil inventories was not necessarily as bullish as it seemed.

"Keep in mind the Houston Ship Channel saw significant disruptions last week due to fog," leading to lower oil imports, said The Schork Report edited by U.S. trader and analyst Stephen Schork. "Thus a large draw is not indicative of strong demand, but of weak imports."

Oil has hovered near $100 for the last few months as traders mull signs of an improving U.S. economy amid slowing global growth.

"We continue to expect that oil demand will grow well in excess of production capacity growth," Goldman Sachs said in a report. "It's only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand."

Investors are also closely watching rising tensions between Western powers and Iran, the world's third-largest crude exporter. Iranian lawmakers are pushing a plan to halt crude exports to Europe before the European Union begins an oil embargo this summer.

The EU embargo is part of a broader strategy by Western nations to pressure Iran to abandon a nuclear program that the U.S. and other nations believe is developing weapons.

On Monday, President Barack Obama announced sanctions on Iran's central bank that will make it harder for Iran to sell its oil to other countries.

"As tensions between Iran and the West escalate, the risk to crude oil prices is becoming increasingly skewed to the upside," Goldman Sachs said.

In other energy trading, heating oil was up 0.39 cent at $3.1948 per gallon and gasoline futures added 0.8 cent to $2.9355 per gallon. Natural gas lost 7.2 cents to $2.40 per 1,000 cubic feet.

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Alex Kennedy in Singapore contributed to this report.