Benchmark crude rose $1.09 to US$98.33 a barrel in New York.
Oil inventories typically fall at the end of the year because refiners draw down their inventories for tax reasons, but Wednesday's drop was far larger than analysts expected.
The Energy Information Administration said Wednesday that inventories fell by 10.6 million barrels. Analysts on average forecast a drop of 2.3 million barrels, according to Platts, the energy information arm of McGraw-Hill.
Phil Flynn, an analyst at PFG Best in Chicago, said inventory draw downs in recent weeks have been slower than normal, so refiners were likely playing catch-up. "They are hiding it from the tax man," he said.
After the first of the year, refiners will start building up their supplies again.
Oil prices are also being pushed up by better global economic news and fears that strife in some important oil-producing nations could restrict supplies.
Tensions between Iran and Western nations are rising over Iran's nuclear ambitions, raising fears that oil from the world's fourth biggest producer may be kept from reaching markets in the coming weeks.
Oil traders also are concerned about political instability in Kazakhstan, which exports about 1.3 million barrels of oil per day, about 1.5 per cent of world demand. The Central Asian nation has been battling political protests that have resulted in about 15 deaths in the last month.
Encouraging news about consumer confidence in Germany, a debt auction in Spain and more housing construction in the U.S. sent world stock markets soaring and oil prices up more than three per cent on Tuesday. On Wednesday, however, stock markets in the U.S. and Europe fell back on worries over Europe's ongoing debt crisis. This likely stopped oil from rising even further than it did, analysts say.
Retail gasoline prices were little changed at a national average of $3.21 per gallon, according to AAA, Wright Express and Oil Price Information Service.