Oil prices briefly rose to a record $80 a barrel in afternoon trading Wednesday after the U.S. government reported a surprisingly large drop in crude oil inventories and declines in gasoline supplies and refinery activity.

The report from the Energy Department's Energy Information Administration suggested oil supplies are tightening even as demand remains strong.

That is why oil prices are rising despite OPEC's decision on Tuesday to boost crude production by 500,000 barrels per day this fall, analysts said.

Light, sweet crude for October delivery rose $1.48 to US$79.71 on the New York Mercantile Exchange after hitting US$80 earlier.

In London, October Brent crude gained 58 cents to US$76.96 a barrel on the ICE Futures Exchange.

Despite the rise, oil is still well below inflation-adjusted highs hit in early 1980.

Depending on whom one asks, a US$38 barrel of oil in 1980 would be worth US$96 to US$101 or more today.

Oil's recent advance has been largely due to speculative buying by big investment funds, who are responding to a price structure in which oil contracts for delivery in future months are cheaper than the current front-month contract, said Jim Ritterbusch, president of Ritterbusch & Associates.

Tight demand

That kind of structure signifies tight demand in the immediate future, and is a buying incentive. Investors who buy now will end up with more oil contracts later, when October futures roll over to cheaper contracts for delivery in later months, Ritterbusch said.

"This is a market that wants to run up on the slightest bit of information," Ritterbusch said.

Prices were also being supported by worries a tropical storm that formed in the western Atlantic on Wednesday will become a hurricane and hit critical Gulf oil and gas infrastructure.

In its weekly report on petroleum inventories, the EIA said crude oil supplies fell by 7.1 million barrels in the week ended September 7, more than twice the 2.7 million-barrel decline analysts surveyed by Dow Jones Newswires, on average, had expected.

Gasoline inventories fell by 700,000 barrels, slightly more than the expected 500,000 barrel decline.

Refinery utilisation fell by 1.6 percentage points to 90.5 per cent of capacity. Analysts had expected a 0.1 percentage point decline. And inventories of distillates, which include heating oil and diesel fuel, grew by 1.8 million barrels, more than the 1.4 million-barrel increase analysts had expected.

Imports fell

Crude imports fell by 674,000 barrels a day on average last week to 9.56 million barrels, while gasoline imports fell an average of 298,000 barrels a day to 1.02 million barrels a day.

Demand for gasoline averaged about 9.6 million barrels a day over the last four weeks, about 0.9 percent above last year, EIA said.

Oil's run-up has perplexed some analysts, who expect demand for oil and petroleum products to cool this fall.

"We're at records, but it doesn't appear to be sustainable," said Chip Hodge, energy portfolio manager at John Hancock Financial Securities.

Indeed, the Paris-based International Energy Agency on Wednesday lowered oil demand forecasts for this year and next.

- AP