Oil moves above $78 after US crude supply drop

Oil prices rose above $78 a barrel on Thursday, driven by a weaker dollar and adding to strong gains the previous day, when a drop in U.S. crude inventories suggested demand may be improving.

By early afternoon in Europe, benchmark crude for November delivery was up 43 cents to $78.29 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained $1.20 to settle at $77.86 on Wednesday.

The Energy Department said Wednesday commercial crude inventories decreased by 500,000 barrels to 357.9 million barrels.

"The report showed that the massive overhang of commercial stocks is beginning to be tamed," JBC Energy said in a report.

Some analysts predict that robust demand growth in emerging economies will help offset sluggish consumption in developed countries.

Goldman Sachs said it expects "the supply-demand balance to continue to tighten ... as continued global economic growth continues to strengthen demand."

The dollar weakened on concerns the Federal Reserve might take further action to boost the U.S. economy. That weakness helped propel the crude price as it made the commodity cheaper for investors holding other currencies.

The market was also waiting for new U.S data on economic growth and initial jobless claims later Thursday, which could alter the price course. News from Europe, where Ireland said it put more money into its failed banks and Spain's debt was downgraded, was taken in stride.

Commerzbank said "the fundamental climate on the oil market suggests prices will stay within the multi-month trading range from $70 to $80 a barrel.

In other Nymex trading in October contracts, heating oil rose 1.7 cent to $2.2079 a gallon and gasoline was up 1.6 cents at $2.0123 a gallon. November natural gas rose 2.1 cents to $3.983 per 1,000 cubic feet.

In London, Brent crude rose 47 cents to $81.24 a barrel on the ICE Futures exchange.