NEW YORK -- Oil prices rose above $74 a barrel on Wednesday after a big drop in U.S. crude inventories and the formation of a tropical storm in the Gulf of Mexico that could disrupt oil and natural gas output in the world's largest energy consumer.

U.S. crude futures were up $1.64 to $74.02 a barrel . London Brent crude climbed $1.55 to $72.06 a barrel. Oil was last above $74 on Aug. 6.

U.S. crude stocks fell 5.2 million barrels last week, the Energy Information Administration said, surpassing analysts' expectations for a decline of 2.3 million barrels.

"Crude is rallying here because of the large draw and because of the tropical storm in the Gulf of Mexico," said Mark Waggoner, president of Excel Futures.

A tropical depression in the Gulf of Mexico strengthened into Tropical Storm Erin and was expected to make landfall Thursday evening south of the refining hub at Corpus Christi, Texas, the U.S. National Hurricane Center said.

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Shell shut down a small natural gas production facility in the path of the storm on Tuesday and began evacuating nonessential personnel.

Other energy companies operating in the Gulf, home to a third of U.S. oil and gas production, were monitoring the situation.

Expectations that Tropical Storm Dean, currently in the mid-Atlantic Ocean, would strengthen into the first hurricane of 2007 this week further supported prices.

The market also remained on edge over the U.S. subprime mortgage crisis, which has rattled equity and other financial markets.

"The fallout from credit markets is not yet over," Harry Tchilinguirian, oil analyst at BNP Paribas, said in a report.

"The more prolonged the weakness in equities is, the more negative market sentiment can turn. And, in the short run for oil, this could prompt a further liquidation of net long positions built up by noncommercial players."

European stocks fell for a second day on Wednesday, while Japan's Nikkei share average sank more than 2 percent to hit its lowest level this year.

However, U.S. stock markets rose after a solid industrial production report and benign inflation data.

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