Updated from 1:19 p.m. EDT

Oil prices eased back below $35 a barrel Friday, as the buying frenzy sparked Thursday by reports of escalating Middle East violence subsided.

Thursday's market rally, set off by reports of Israeli bombings and an explosion aboard a U.S. naval ship off the Yemeni coast, pushed oil up nearly $4 in as many hours, as a record 329,441 contracts were traded, according to Tim Evans, senior energy analyst at

IFR-Pegasus

.

Oil prices

peaked Thursday at $37 -- just short of the 10-year high of $37.80 set last month -- before easing back in the afternoon to settle just above $36. Early Friday afternoon, the benchmark contract for November delivery of crude oil was trading down $1.07 from Thursday's settlement price, at $34.99 a barrel.

Heating oil and gasoline prices also retreated on Friday. After climbing to an all-time high of $1.11 intraday on Thursday, according to analysts, the November contract for heating oil settled down 6.12 cents Friday at $1.02. Gasoline prices fell 3.2 cents on Friday to settle at 96.6 cents on the

New York Mercantile Exchange

.

Despite Friday's drop in oil prices, industry analysts say it could take weeks for crude oil to return to the low $30s, as Arab-Israeli tensions remain high and oil inventory levels remain low. With oil supplies so tight, the market is particularly vulnerable to any news that might affect the flow of oil from the

Organization of Petroleum Exporting Countries

, which produces 40% of the world's oil.

Though OPEC's membership includes Indonesia and Venezuela, the majority of the oil produced by OPEC comes from Mideast countries. The non-Arab OPEC members are already producing very close to capacity, while Iraq is constrained by U.N.-imposed production limits.

According to the

TheStreet Recommends

Energy Information Administration

, of OPEC's remaining members, only Saudi Arabia and United Arab Emirates have enough capacity for substantial production increases. Some fear OPEC's Arab members may restrict oil exports to the West if the Israeli-Palestinian conflict spills over into neighboring Arab countries. Though the possibility of an oil embargo remains remote, continued violence also threatens to disrupt the transportation of OPEC oil to the U.S.

On Friday, European leaders scrambled to arrange a Mideast

summit to ease tensions between Israelis and Palestinians after Israeli helicopter gunships attacked Palestinian targets Thursday in response to the mob killing of at least two of its soldiers. There are also fears that an

explosion Thursday that killed 17 U.S. soldiers near Yemen may have been instigated by Arab terrorists sympathetic to the Palestinians' plight.

Tyler Dann, an analyst at

Banc of America Securities

, said Thursday's price spike "underscores the limited excess capacity, low inventories and robust demand that characterizes this oil market."

Though prices fell as low as $34.75 a barrel on Friday, oil is still nearly as expensive as it was in late September when

President Clinton

was concerned enough about supplies that he

ordered 30 million barrels of oil be released from the

Strategic Petroleum Reserves

, an action not taken since the Persian Gulf war.

While there remains a possibility that Clinton could release additional oil from the reserves in the event of a severe supply shortage, and OPEC may vote to increase its output ceiling at its November meeting, analysts now widely expect oil prices to remain above $30 a barrel through the end of the year.