Oil surges over $134 on supply woes

By Richard Valdmanis

NEW YORK (Reuters) - Oil prices surged $5 to a record over $134 a barrel on Wednesday after a U.S. government report showed a surprise drop in crude stockpiles, reinvigorating fears of a supply crunch.

The gains bring oil up more than 34 percent so far this year in a rally that has raised alarm bells in consumer countries like the United States, already hard-hit by a housing slump and credit crisis.

Weakness in the U.S. dollar encouraged Wednesday's buying spree by bolstering the purchasing power of buyers holding other currencies, dealers said.

U.S. crude settled up $4.19 at $133.17 a barrel before extending its gains to $134.10 by 10 p.m. British time. London Brent rose $4.86 to end at $132.70.

The U.S. Energy Information Administration reported that crude stockpiles in the world's biggest energy consumer fell 5.4 million barrels last week, countering expectations for a build.

"This report gives the market every reason to rally," said Rob Kurzatkowski, analyst at optionsXpress in Chicago.

The fall in weekly inventories intensified concerns that supply problems will persist for years as production falls short of growth in demand. Oil for delivery in December 2016 rose above $142 a barrel on Wednesday -- making it the loftiest contract on the futures curve.

Investment bank Goldman Sachs has said it thinks oil prices will average $141 a barrel in the second half of this year and could top $200 a barrel by 2010.