Oil rose for a third day on Wednesday, boosted by the possibility that Tropical Storm Gustav could threaten Gulf of Mexico oil and gas installations, as well as data showing an unexpected fall in US crude oil stocks.

Crude for October delivery was up $2.23 at $118.50 a barrel by 1501 GMT, after settling up $1.16 on Tuesday. London Brent crude was up $1.85 at $116.48 a barrel.

'Before the data, the energy markets were already up because of the storm and so the EIA numbers have not made much of an impact, although crude inventories being down was a bit of a surprise,' said Phil Flynn, analyst at Alaron Trading.

Data from the U.S. Energy Information Administration showed crude oil stocks in the world's top energy consumer fell 100,000 barrels last week, when analysts had predicted a rise of 1 million barrels.

Gasoline stocks fell 1.2 million barrels, less than forecasts for a 2.9 million barrel fall. Distillate inventories, which were expected to rise by 500,000 barrels, were unchanged.

Oil could head towards last week's near-three-week high of just above $122 a barrel depending on the weather in the Gulf of Mexico, said Masaki Suematsu, analyst at broker Newedge in Tokyo.

'Gustav is headed right toward the centre of the Gulf of Mexico. Hurricanes taking this route are usually threatening,' he said.

Gustav was downgraded to a tropical storm on Wednesday after it came ashore in Haiti, but forecasters expect wind speeds to regain hurricane force.

Most computer models used to predict hurricane paths showed Gustav headed towards Louisiana and Texas, where rigs produce a quarter of U.S. crude oil.-Reuters