Oil hovers above $106 after US supplies drop

The price of oil was steady above $106 a barrel Thursday after U.S. crude supplies fell for a third straight week, a sign of increased demand in the world's largest energy consumer.

By early afternoon in Europe, benchmark crude for August delivery was down 16 cents at $106.32 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained 48 cents to settle at $106.48 on Wednesday.

Despite cooling economic growth in China, the price of oil was underpinned by another sizable decline in U.S. oil supplies. The U.S. crude inventory fell by 6.9 million barrels last week, bringing the three-week decline to 27.1 million barrels, the Energy Department said.

That is the largest drop of crude stocks over a three-week period since at least 1990, analysts said.

The drop in stocks came about despite the fact that crude production in the U.S. climbed to 7.5 million barrels a day last week, its highest level since December 1990, said a report from Commerzbank in Frankfurt.

That was somewhat offset by a sharp decline in gasoline demand compared with last week. Gasoline consumption fell by 570,000 barrels from a week ago, when demand was boosted by drivers hitting the road for the July Fourth holiday. Gasoline supplies rose by 3.1 million barrels last week.

Analysts had expected a decline of 2.5 million barrels in crude oil supplies and no change in gasoline supplies, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Oil markets have also been supported this week by expectations that the Federal Reserve will support the U.S. economy as long as necessary. Fed Chairman Ben Bernanke told lawmakers that there was no preset schedule for ending the existing stimulus program, raising hopes it may not end as quickly as some had feared.

In London, Brent crude was down 34 cents to $108.27 a barrel on the ICE Futures exchange.

In other energy futures trading on Nymex:

Wholesale gasoline fell 1.83 cents to $3.0198 a gallon.

Heating oil rose 0.12 cent to $3.072 a gallon.

Natural gas added 1.1 cents to $3.64 per 1,000 cubic feet.