Oil prices edged up toward $89 a barrel on Wednesday after a report showed U.S. crude supplies unexpectedly fell last week, suggesting demand could be improving, and the dollar weakened against the euro.

By early afternoon in Europe, benchmark crude for December delivery was up 16 cents at $88.69 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.96 to settle at $88.34 in New York on Tuesday.

In London, Brent crude for December delivery was down 50 cents at $110.65 a barrel on the ICE futures exchange.

The American Petroleum Institute said late Tuesday that crude inventories fell 3.1 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 1.8 million barrels.

Inventories of gasoline dropped 1.6 million barrels last week while distillates slid 2.2 million barrels, the API said.

Despite the lower stockpiles, some concluded that it was too early to attribute it to higher demand.

The fall in crude inventories "does not imply bullish demand-side developments as the fall can be largely attributed to lower imports," said analysts at JBC Energy in Vienna.

The Energy Department's Energy Information Administration reports its weekly supply data — the market benchmark — later Wednesday.

Crude has jumped 17 percent from $75 two weeks ago as investor optimism was bolstered by signs European leaders will soon announce a plan to contain the region's sovereign debt crisis.

Oil traders have also been encouraged by gains in global stock markets after a period of sustained losses. The Dow Jones industrial average rose 1.6 percent Tuesday and most Asian and European stock markets advanced Wednesday.

"The key elements for the oil market remain the currency movements and the strong upside momentum in the global equity markets that currently provide strong support to the oil prices," said an energy report from Sucden Financial in London. "Based on the recent tentative economic conditions, crude oil prices manage to hold fairly well, with recent gains eyeing the $90 per barrel area" for the Nymex contract.

The dollar weakened against the euro on Wednesday, as the European currency found support in reports that Germany and France were closer to agreeing on a massive expansion of the eurozone bailout fund.

A weaker dollar makes crude cheaper for investors with other currencies. The euro rose to $1.3841 from $1.3747 late Tuesday in New York.

Some analysts, however, are forecasting commodities such as oil will drop next year amid weak global economic growth and a stronger U.S. dollar.

"We would still expect fresh falls in 2012 as global economic activity remains sluggish, risk appetite stays fragile and the dollar recovers more ground," Capital Economics said in a report.

In other Nymex trading, heating oil added 0.21 cent to $3.0292 per gallon and gasoline futures dropped 1.92 cents to $2.6981 per gallon. Natural gas added 1 cent to $3.563 per 1,000 cubic feet.


Alex Kennedy in Singapore contributed to this report.

Copyright 2011 The Associated Press.