NEW YORK (AP) Oil prices jumped above $42 per barrel Wednesday with a government report showing demand for gasoline is on the rise and crude inventories are not growing as fast as was thought.

Light, sweet crude for April delivery gained $2.54 to settle at $42.50 on the New York Mercantile Exchange.

Phil Flynn, an analyst at Alaron Trading Corp., said a drop in retail gas prices, combined with the Energy Department report that showed demand is rising, had traders pumping money into energy stocks.

Gasoline futures soared 8 percent.

Drivers "like a bargain, and when they see those prices go down, they'll fill up," Flynn said. "Consumers are spending more on gasoline."

But Geoff Sundstrom, a fuel price analyst for AAA, cautioned that it's too soon to say whether motorists have returned to their old driving habits.

"I'd love to be more optimistic," Sundstrom said. "But we don't have enough information to say that Americans are getting out in large numbers."

There is too much economic data rolling out each day that suggests the U.S. economy is far from recovering, he said.

For example, the National Association of Realtors said Wednesday that sales of existing homes unexpectedly plunged in January to the lowest level in nearly 12 years. And luxury retailer Saks Inc. also reported a fourth-quarter loss as it slashed prices to hold onto affluent shoppers.

Bankrupt telecom equipment company Nortel Networks Corp. also said it would slash 3,200 jobs over the next several months. The cuts come on top of a previously announced reduction of 1,800 jobs.

The Energy Department's Energy Information Administration report said U.S. gasoline inventories dropped almost 2 percent for the week ended Feb. 20.

Gasoline production also increased last week, averaging 8.9 million barrels per day as refiners take advantage of a market that's awash in cheap crude, analyst Stephen Schork said.

"For the first time in a year they can make money manufacturing gasoline," he said.

Gas prices have been falling for almost two weeks, dropping another penny overnight to a national average of $1.891 per gallon, according to auto club AAA, the Oil Price Information Service and Wright Express.

Gas prices are still 5 cents more than they were a month ago but $1.251 less than a year ago.

The EIA report said that gasoline demand was up 1.7 percent, compared with the same period last year to an average of 9 million barrels per day.

Gasoline inventories slipped by 3.4 million barrels, or 1.6 percent, to 215.3 million barrels, which is 7.6 percent below year-ago levels.

That sent gas future rocketing, which could check any further declines within weeks, depending on production levels of refiners. But most refiners are undergoing seasonal maintenance, so production levels are lower than normal.

The government report said that crude inventories rose by 700,000 barrels to 351.3 million barrels. Analysts expected crude stocks would grow by 2.25 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Oil producers have been unable to cut production fast enough in the global downturn and U.S. storage capacity is near its limit.

A cut of 4.2 million barrels a day by the Organization of Petroleum Exporting Countries has not done much to bolster prices. OPEC's leaders, who have said recently that they would like prices to rise to $70 a barrel, have said another cut is likely when they meet March 15 in Vienna, Austria.

Mike Zarembski, a senior commodity analyst at brokerage OptionsXpress Inc. said oil traders are heartened by reports that 80 to 90 percent of OPEC members were complying with production cuts.

"For the cartel, that's quite unbelievable," Zarembski said. "There were some expectations that some of those members would sneak in a few extra barrels to sell. But maybe OPEC is serious about doing something about low prices."

In other Nymex trading, gasoline futures gained 8.3 cents to settle at $1.1667 a gallon. Heating oil rose 2.95 cents to settle at $1.2377 a gallon, while natural gas for March delivery slid 18 cents to settle at $4.056 per 1,000 cubic feet.

Brent prices rose $1.79 to settle at $44.29 a barrel on the ICE Futures exchange in London.

Associated Press Writers George Jahn in Vienna and Alex Kennedy in Singapore contributed to this report.

Copyright 2009 The Associated Press.