Oil prices have continued to add on to recent gains today, with prices blowing through the previous intra-day high and heading closer to the psychological $80 barrier. Today's move comes in reaction to a government report that showed a much larger than expected drop in crude inventories.

With oil prices heating up over the past couple of weeks OPEC tried to step in and cool off the market by lifting its daily output quota yesterday, but analysts are now thinking that yesterday's move was too little, too late. Earlier this week the oil cartel was indicating that no production increases would be needed, but that all changed once Saudi Arabia stepped in and convinced the other members that a 5000,000 barrel a day increase was needed.

With the high demand winter heating months on the horizon, industry experts are expecting to see a further supply crunch in the months ahead, but some OPEC nations were cautious that the weak housing market would slow down the economy and reduce the nation's demand. After today's inventory report it is looking more obvious that supply is definitely lacking demand.

Analysts had been expecting to see a drop of around 2.7 million barrels last week, but the Energy Department's inventory report showed that the decline was actually much higher than expected at 7.01 million barrels.

As a result of today's reports oil traded up to a new record high of $79.78 and is currently up $1.42 to $79.65.

Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer

[photo FreeWine]