NEW YORK, May 8: Oil prices rose nearly four per cent on Thursday as news of an explosion on a US warship in the northern Arabian Sea extended gains made on a surprise drop in US crude stocks.

US light crude in New York rose $1.05 to $27.28 a barrel, while Brent futures in London were up 69 cents at $24.80 a barrel.

The cause was under investigation, the Navy said.

“It’s going up on the explosion. Until they find out what the cause is, people will assume it could be a terrorist threat,” an oil trader said.

Oil rallied on Wednesday after last week’s five-month lows, on falling US crude oil stockpiles, cut down by refineries running at their highest rates in nearly two years.

US government data showed weekly crude inventories fell 800,000 barrels last week to stand just above 287 million barrels, contrary to predictions of a 3-million barrel build.

On an annual basis, crude supplies stand nearly 12 per cent below year-ago levels.

“The problem is that total oil inventories have fallen at a time when they should be showing a rapid seasonal build,” said JP Morgan oil analyst Paul Horsnell in a weekly report.

“There appears to be enough in the data in the last two weeks to suggest that the lurch toward bearish sentiment has been overdone,” he added.

Prices have fallen about 7.5 per cent since Oil Producing and Exporting Countries’ surprise decision two weeks ago to raise its official output limits while claiming a large cut in actual supplies.

Analysts said the deal was in effect only a slight trimming of production because the cartel had used an unrealistically high threshold for its reduction. OPEC is due to meet again on Sunday in Qatar.

The US data showed Saudi Arabia’s exports to the United States remained higher than normal after OPEC producers agreed to lift output to help make up for the loss of Iraqi exports during the war.

Producers are waiting to see when Iraqi crude will return to the international market, as domestic production increases but exports remain hamstrung by political wrangling.