Oil up on U.S. inventory, shrugs off economy

LONDON (Reuters) - Oil prices rose on Wednesday as investors shrugged off concerns over the health of the global economy following a unexpectedly very large drop in U.S. crude oil inventories.

"The dramatic drawdown in crude oil cannot be dismissed so easily. This could be the fundamental catalyst to decidedly take out the $90 barrel level," said John Kilduff, a partner at Again Capital LLC in New York.

U.S. crude stocks fell 9.85 million barrels last week, according to the weekly inventory data from the Energy Information Administration (EIA), compared to a forecast of 2.5 million from analysts polled by Reuters.

Oil was also buoyed by mostly in-line readings on U.S. consumer prices and stronger-than-expected factory data from the New York Federal Reserve.

U.S. light crude oil rose 15 cents to $88.43 at 1631 GMT. ICE Brent crude for January recovered earlier losses and rose 70 cents to $91.85.

The U.S. inventory data overshadowed concerns that the eurozone debt crisis could spread after Spain was warned on Wednesday by Moody's that its debt rating could be downgraded.

It also follows just one a day after the U.S. Federal Reserve dampened expectations of rapid economic recovery in the world's largest oil consuming nation as it pointed to high unemployment.

COLD WEATHER

The CPI data helped keep a strong dollar, which rose 0.42 percent against a basket of major currencies.

A stronger dollar can depress dollar-denominated oil prices as it makes fuel more expensive to holders of other currencies.

Strength in the greenback can also push investment into foreign exchange markets and out of from commodities.

In a note to clients, MF Global said the slew of data had not changed its outlook for the energy markets, which it continued to expect would experience a sharp correction over the next few weeks.

Thorbjorn Bak Jensen, an oil analyst at Global Risk Management, said that once countries were put on a ratings watch a downgrade usually followed, referring to ratings agency Moody's warning it may cut Spain's rating.

Bearish sentiment has been limited by very cold weather in the United States and Europe, which is expected to continue through the week.

That had added to futures market buying but physical oil traders said fuel stocks looked comfortable.

(Additional reporting by Randy Fabi in Singapore; editing by William Hardy)