Oil prices break record as supply tightens

WASHINGTON -- MARKETS-OIL (UPDATE 7):UPDATE 7-Oil hits record after OPEC fails to calm market

Oil prices jumped to a record, just below $80 a barrel, Wednesday after the government said there was a sharp drop in oil inventories in the USA last week.

A decline in the value of the dollar also boosted oil prices, which are traded in dollars. A dollar drop means oil needs to be priced higher in order for sellers abroad to maintain purchasing power.

After breaking records, not adjusted for inflation, Tuesday, the price of a barrel of light, sweet crude for delivery in October rose another $1.68 Wednesday to $79.91. Adjusted for inflation, oil prices are still below those seen in early 1981, when prices were nearly $93 in today's dollars.

The increase came a day after OPEC said it would increase production starting Nov. 1. But investors remain concerned that supplies are tight and getting tighter.

"It still looks like it's not going to be quite enough. That's what the market is telling us," says Evan Smith, co-manager of the global resources fund at U.S. Global Investors.

Oil inventories fell for a third-consecutive week last week, the Energy Department's Energy Information Administration said. The decline lowered the amount of oil available to 20.6 days of supply, a measure that shows how long oil in inventory would last given current demand. That was the lowest amount in eight months.

Such anemic inventories will likely keep upward pressure on prices, the EIA's analysts said.

"The market fundamentals, characterized by rising demand for OPEC oil and fairly low surplus capacity, should keep markets firm even with the planned increase in OPEC production, leaving the market vulnerable to supply disruptions," they wrote.

The higher oil prices are not expected to have an impact on gasoline costs, Smith says. With the summer driving season ending, demand for gasoline should decline, leading to at least steady, if not lower, prices at the pump.