Crude's Modest Reprieve

Updated from 10:54 a.m. EDT

Crude prices reversed seven straight days of declines Wednesday on a Nigerian oil strike, American calls for immediate sanctions against Iran and a larger-than-expected decline in domestic crude supplies.

The October contract for light, sweet crude added 12 cents to settle at $63.97 a barrel after trading as high as $64.75 on Nymex. The front-month contract fell to a fresh five-month low Tuesday after two energy groups cut their projections for global oil demand this year, thanks to high prices.

Crude lifted the rest of the energy complex, with heating oil and gasoline gaining 1 cent to $1.74 a gallon and $1.55 a gallon, respectively.

Natural gas dropped 4 cents to nearly a two-year low of $5.44 per million British thermal units on little hurricane activity and no threat to the Gulf Coast's petroleum installations. High supply levels and mild temperatures nationwide also tempered prices because the fuel is used by some utilities to produce electricity.

Tropical Storm Florence was off the coast of Newfoundland in Canada, while the third hurricane of the season, Gordon, was 600 miles southeast of Bermuda. However, Gordon, the seventh named storm of the season, is not expected to make landfall. This year's hurricane season has been quieter than last year, and forecasters have reduced their forecasts twice in the past month. They now expect 13 named storms instead of 15.

The International Atomic Energy Agency discussed Iran's refusal to halt uranium enrichment, and pushed for Iran to negotiate. The U.S., meanwhile, called for immediate sanctions to punish Iran for missing a U.N. deadline to halt its nuclear program. Russia and China, who each have significant business operations in Iran, have been reluctant to do so.

Still, some energy analysts maintain that the U.N. does not have the stomach to impose a trade embargo against Iran.

"The U.N. would be unlikely to try to embargo exports since there is not enough spare [oil] capacity in the rest of the world to make up for the loss. Iran needs the income, and there is no reason to expect them to halt exports," said James Williams, an energy analyst at WTRG Economics in London, Ark.

In February, Iran restarted nuclear activities after a two-year hiatus despite threats of sanctions or military attacks. Tehran maintains it restarted enrichment to produce only electricity, and not, as the West contends, to build atomic weapons. The world's fourth-largest crude producer has suggested it may slash oil exports if the West slapped it with trade embargoes.

Despite the concern over global oil supplies, domestic inventories of crude are robust. There is nearly 6% more oil in storage than the same period last year, and over 6% in the gasoline reserves over the same time in 2005, according to the U.S. Energy Department's weekly petroleum supply report.

Still, threats -- real or imagined -- hit oil prices hard, because there is so little to go around. The world uses about 85 million barrels of crude per day, and only has 2 million barrels of spare capacity.

Despite the increase in crude prices today, analysts generally expect prices to remain around $65.

"We do not see prices falling much below $65 for the remainder of the year," said Rakesh Shankar, an energy analyst at Moody's Economy.com in West Chester, Pa. "Excess production is still very tight in global oil markets, and the world is still vulnerable to disruptions in supply."

Crude inventories fell by 2.9 million barrels last week as refiners increased production of distillates, which include heating oil and jet fuel. Now that the summer driving season is over, refiners can concentrate on making more heating fuel for the winter.

Distillate production hit the second highest weekly average ever, reaching 4.5 million barrels per day. Consequently, supply levels jumped by 4.7 million barrels, more than double projections in a Bloomberg poll of analysts.

Gasoline inventories climbed by 100,000 barrels, its third straight increase, as refiners switched from making gasoline to distillates.

Refinery capacity inched down 0.6% to 93%.

A three-day strike in Nigeria's oil industry began today, prompted by the killing of an oil worker by police last month. The strike comes on the heels of the death of a ChevronCVX employee Tuesday by rebels in the Niger Delta, where much of the country's oil is sourced. Rebels have been kidnapping oil workers in a bid to pressure the government to give them a share of the country's oil wealth. The attacks have thus far cost the country around 870,000 barrels a day, or more than a quarter of Nigeria's production.

Energy shares were marginally higher, with the Amex Oil index picking up 1.5%. Sunoco SUN, ConocoPhillips COP, Occidental PetroleumOXY and Anadarko PetroleumAPC were advancing by as much as 3% each.

Despite a 1,000-barrel pipeline leak in Long Beach, Calif., BP's stock was rising 2.2% to $66.68. The pipeline connects the port to a nearby BP refinery, and most of the oil had been recovered by Wednesday.