Crude Jumps to Record Close

The September contract rises $1.63 to $63.94 a barrel.
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Updated from 2:37 p.m. EDT

An unspecified security threat to U.S. diplomatic offices in Saudi Arabia sent oil prices spiking into uncharted territory Monday.

Crude for September delivery settled up $1.63 to $63.94 a barrel on Nymex, a new closing high for a front-month contract. Gasoline futures climbed 3 cents to $1.86.

"Uncertainty coming from the security threats to the U.S. embassy is driving the market," says Thorsten Fischer, senior economist at Economy.com.

The major oil producers were higher, too, with

Exxon Mobil

(XOM) - Get Report

gaining 1.9%,

Royal Dutch

(RD)

adding 1.3%,

BP

(BP) - Get Report

climbing 2.5% and

Chevron

(CVX) - Get Report

increasing 2.4%.

The U.S. embassy and consular offices in Saudi Arabia will be closed Monday and Tuesday following "a threat against U.S. government buildings," wire reports said. The precaution comes one week after the death of Saudi King Fahd.

Kevin Kerr, president of Kerr Trading International, says he's not surprised by the rise in crude oil prices and says $68 a barrel is the next target.

"Oil will trade past $65 a barrel, gaining momentum form the Saudi Arabia situation, hurricane threats, refining shutdowns and increasing demand," Kerr says. "Unfortunately this is the next step toward $70 a barrel."

Meanwhile, a two-week-old series of refinery shutdowns continues to create upward pressure on crude prices, raising concerns about a possible gasoline supply shortages as summer wears on.

The latest incidents included a weekend fire at

Sunoco's

(SUN) - Get Report

330,000-barrel-a-day refinery in Philadelphia and a shutdown at

ConocoPhillips'

(COP) - Get Report

refinery in Borger, Texas.

Retail gasoline prices rose to a record $2.339 on Friday.

"Unless there is evidence of a slowdown in demand growth, the rally is likely to continue," Fischer says. "For a time we thought demand was slowing, but growth gained momentum with a strong jobs

report in the U.S. last month and continued low long-term interest rates."

In Iran, the newly elected conservative president, Mahmoud Ahmadinejad, was sworn in over the weekend,

Reuters

reported. The country also rejected a European package of incentives intended to prevent it from restarting its nuclear initiative.

"The ongoing nuclear tensions involving Iran are unnerving the oil market and carry with them the unlikely -- but real -- possibility of a military confrontation at some point," Raymond James said in a note Monday. "More broadly, we have to remain mindful of other wildcard countries, as well: Saudi Arabia, Russia, Nigeria, Venezuela, and Iraq. While the risk of each of these individual oil supply disruptions is low, in the aggregate the oil market is facing what may be an unprecedented combination of potential risk factors."

Analysts say that oil prices, which surged to another record high last week, were also supported by rising natural gas prices. Natural gas prices rose to a nine-month high of $8.80 per thousand cubic feet last week.

One of the reasons for rising gas prices is the slowdown in coal shipments to power plants. Heavy rains have damaged rail lines and caused derailments in Wyoming's Powder River Basin, forcing power plants to purchase more natural gas for power generation. Many U.S. power plants can operate on either natural gas or coal, depending on the price and availability of each.

Hot weather around the U.S. has also raised electricity demand.

In company news,

El Paso

(EP)

posted a second-quarter loss Monday of $238 million, or 38 cents a share, citing writedowns, particularly in Brazil.

After adjusting for some $450 million in impairments, Anatol Feygin, an analyst at Banc of America, estimated El Paso had recurring earnings of 7 cents a share, which is well below the consensus estimate of 13 cents a share. The stock fell 1.6% to $12.10.

At midafternoon, the Amex Oil Index was up 2.4%, led by

Amerada Hess

(AHC) - Get Report

with a 4.2% increase to $125.42. The Philadelphia Oil Service Sector Index is up 1.6%, headed by

Global Industries

(GLBL)

, which climbed 4.4% to $10.92.