Oil prices surged to record levels Wednesday, topping $112 a barrel, after a government report showed an unexpected decline in crude supplies.

Oil contracts for May delivery climbed $2.77 to $111.27 a barrel, after touching a record $112.21 in electronic trading. The previous intraday mark of $111.80 was set March 17.

Traders expected prices to continue climbing.

"If we close above $111.80, $115 is next," said Phil Flynn, senior market analyst of Alaron Trading in Chicago.

In its weekly inventory report, the Energy Information Administration said crude stocks fell by 3.2 million barrels in the week ended April 4. Analysts had been expecting an increase of 2.4 million barrels, according to a Dow Jones poll.

Oil was trading just above $109 when the report was released at 10:30 a.m. ET. The reaction was a wave of buying, with the contract quickly pushing above $110.

After that, short sellers - traders who bet on a drop in the price of oil - were forced to buy contracts in order to cut their losses, according to Stephen Schork, publisher of Pennsylvania-based industry newsletter The Schork Report.

"All bets are off right now," he said, adding that oil will now probably trade between $103 and $115 a barrel in the near term.

The EIA said gasoline supplies fell by 3.4 million barrels. Analysts had only expected a drop of 2.3 million barrels. Distillates, used to make heating oil and diesel fuel, fell by 3.7 million barrels, more than the expected drop of 1.2 million barrels.

The supply report comes on a day when average gasoline prices hit a new record high of $3.343 at the pump, according to AAA. Prices are up nearly 20% from what they were last year.

This was despite the fact that demand for gasoline was up just 0.3% compared to the same period last year, according to the EIA report.

Analysts said weakness in gasoline refinery levels are a contributing factor to the pump price surge, especially as the warm weather driving season approaches.

Refining levels are currently at 83.1%, according to the EIA. They should be running at 89% to 90% this time of year, said Mark Waggoner, president of Excel Futures, a California-based commodities trading firm.

"Oil companies need to ramp up ... fast," he said.

Refinery input rose by about 142,000 barrels a day last week, the EIA said. Gasoline and distillate production both increased slightly.