Oil raced higher on Wednesday after a sharp fall in United States (U.S.) inventories stirred up fears of a supply shortfall ahead of winter.

At midday, U.S. crude rose $1.28 to US$86.55 a barrel, erasing three days of losses that dragged prices down from a record $90.07 struck on Friday.

London Brent crude rose $1.15 to $84.00.

U.S. crude oil stocks fell 5.3 million barrels last week, according to data from the U.S. Energy Information Administration, well above analyst forecasts for an 800,000 barrel build.

"This report could set the stage for a test of the contract highs," said Jim Ritterbusch, president of Ritterbusch & Associates. "This is going to entice a lot of fund money back into the long side of this market."

The data also showed a 1.8 million barrel fall in distillate stocks and a 2 million barrel draw in gasolene stocks.

Mew records

Oil has jumped about 40 per cent this year and surged to new records over the past month on worries over consumer nation inventories as the Northern Hemisphere gears up for winter.

A fresh wave of cash has also supported prices from investors eyeing tighter fundamentals, the weak dollar, and tensions in the Middle East.

"The debate remains very much alive as to whether the oil market remains seriously under-supplied going into winter," investment bank Citi said in a research note.

"A move north of US$95 or a move south of US$80 both appear possible right now."

Further supply concerns came from news that Mexico - one of the top exporters to the U.S. market - had closed its main oil exporting ports due to bad weather on Tuesday.