Oil rose nearly $1 and moved closer to $117 a barrel today, extending gains of $3 in the previous session, as a larger-than-expected drawdown in stocks in the United States rekindled supply concerns.
However, a tight credit market in the US could limit a sharp rise in prices, analysts said.
US crude was up by 91 cents to $116.91 a barrel at 0219 GMT, after the country's crude stocks dropped 400,000 barrels, while gasoline inventories fell by 6.4 million barrels in the week to August 8th as refinery throughput decreased, the Energy Information Administration (EIA) said.
The fall in gasoline stocks was beyond analysts' expectations of a 2.1-million-barrel decline. Distillates stocks also unexpectedly decreased, and the drawdown came after companies shut US Gulf Coast facilities due to Tropical Storm Edouard.
The conflict between Russia and the US over Georgia also supported prices.
Georgia had accused Russia of breaking a cease-fire in their six-day-old conflict yesterday, and US president George W Bush demanded Moscow resolve a crisis that has strained relations with the United States.
Russia, on the other hand, accused the US of playing a dangerous game in the Caucasus by backing Georgia and denied Moscow was not doing enough to prevent looting.
However, oil is still far away from this year's peak at more than $147 a barrel it hit in mid-July, and analysts said it's unlikely the market could move anywhere close to that level soon.
"There are not that many factors that can drive prices higher," said Gerard Burg, a commodities analyst at National Australia Bank in Melbourne.
"The conflict in Georgia does not have that much impact. The pipeline was already offline," he added.
BP has already closed an oil pipeline and a natural gas pipeline running from its Caspian Sea fields through Georgia but said neither had been damaged.
A third BP pipeline that runs through Georgia, the Baku-Tblisi-Ceyhan oil pipeline, was shut last week following an explosion in Turkey.
Overall, consumer spending in the US is still weak amid tight credits issues, and high energy prices have forced consumers to drive less.
The US Transportation Department said today that Americans drove 12.2 billion miles, or 4.7 per cent, less in June compared with a year earlier. It was the eighth month in a row driving declined. Eyes are now on Opec, to see if it would cut back on oil supplies.
Iran's Opec governor Muhammad Ali Khatibi said on Tuesday that the organisation should trim its oil output if demand continues to fall in slowing industrialised economies.
Mr Khatibi said Iran is pumping around 4 million barrels per day of total capacity of around 4.3 million bpd. Iran's informal Opec target is 3.817 million bpd, although Khatibi said Tehran had never agreed with Opec's calculation of that target.
Iran believed it was entitled to produce around 100,000 bpd more than that target, Mr Khatibi said.
The US dollar rose yesterday for a ninth consecutive session against a basket of currencies, by 0.2 per cent to 76.278.
Reuters