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Updated from 12:44 p.m. EDT

Crude prices declined Tuesday, a day ahead of both the U.S. inventory report and OPEC's expected announcement of a formal increase in oil production.

July crude closed down 62 cents at $55 a barrel on Nymex, after jumping more than $2 Monday on continued concerns over distillate supplies. Gasoline futures fell 1 cent to $1.54 a gallon.

The Energy Department is scheduled to release its weekly inventory report on Wednesday. Crude stocks are estimated to remain about the same from the prior week's report, while distillate levels are expected to increase by 1.2 million barrels and gasoline by 600,000 barrels.

Prices were pressured Tuesday by a host of comments from OPEC officials in Vienna, with some saying the organization is helpless in the face of global refining shortages. The cartel will probably raise its formal production ceiling to 28 million barrels a day, but in reality it's already producing more than that.

"There is certainly not a shortage of supply, there is absolutely no shortage,"


reported Saudi Oil Minister Ali al-Naimi as saying. Raising the production quota, he said, is "just symbolic." Naimi added that "middle distillates are in short supply as a result of the refinery configuration," according to the report.

Heating oil futures, which are the benchmark for all distillate trading, rallied about 4% on Monday, exceeding the April all-time high of $1.659 to $1.67 a gallon.

Some economists refuse to link higher crude prices to surging distillate prices, claiming that a distillate supply crunch is a direct result of a refining capacity shortage while crude supply is abundant. Others argue that heightened demand for distillates is propelling refiners to buy oil at high prices in order to produce as much heating oil, diesel and jet fuel as possible to meet market demand.

Jacques Rousseau, an integrated oil analyst at Friedman Billings Ramsey, said in a research report Tuesday that "crude oil prices continue to surge due to above-average economic growth, and uncertainty as to whether global supply will be able to

meet demand in 4Q 2005."

Separately, the analyst said he expects three significant factors to increase the demand for oil in the next few years: China's expansion of its refining and petrochemical facilities; the new U.S. diesel upgrade requirements that start in 2006, forcing refineries to shut down in order to gear up for the new production process; and China's start of a government petroleum reserve that will draw 100,000 barrels a day from the market, which rumors indicate could begin this year.

Rousseau said China is expected to increase its refining capacity by 1 million barrels a day by 2008, a more than 20% increase from the current refining capacity of 4.6 million barrels a day. On the petrochemical side, data show Chinese production of ethylene, which is used to produce plastic, is estimated to increase by 3.3 million metric tons by 2010, up from the current capacity of 5 million metric tons. Rousseau cited

Oil and Gas Magazine

in a telephone interview.

"That is a lot of new refining capacity that will require a lot more crude oil to process," he said." It will continue to feed the growing Chinese economy and increase global demand significantly." Based on this analysis, Rousseau raised his crude oil price forecasts for 2005 to $51 a barrel from $44, and upped his 2006 forecast to $47 a barrel from $40.

Rousseau also raised his rating on

Amerada Hess

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to market perform from underperform based on crude oil price estimates, and he lifted his price target on the stock to $109 from $103. As a result, shares of Amerada Hess rose $3.42, or 3.31%, to $106.83.

Occidental Petroleum's

(OXY) - Get Occidental Petroleum Corporation Report

price target was also revised upward, to $91 from $82, and remains a "favorite pick."

Murphy Oil's

(MUR) - Get Murphy Oil Corporation Report

price target was taken to $59 from $58.

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Elsewhere in the oil and gas universe, shares of

Spinnaker Exploration


jumped more than 8% on news of a successful natural gas discovery in the Mississippi Canyon and on reports of an upgrade by Hibernia Southcoast Capital.

Southwestern Energy

(SWN) - Get Southwestern Energy Company Report

rose for the second day on news of its drilling success in the Arkansas Fayetteville Shale. The news, announced Friday after the market closed, moved shares of the natural gas producer more than 9% higher Monday. The company said 35 out of the 44 newly drilled wells were operational, and six were almost completed or awaiting a pipeline hook-up. Shares climbed an additional 4.7% to $42.53 Tuesday. Raymond James said the company was one of its best performers, up 68% year to date.

Analyst Poe Fratt at A.G. Edwards has increased the price target for offshore driller

Diamond Offshore

(DO) - Get Diamond Offshore Drilling, Inc. Report

to $59 from $51.36 on improved pricing power and backlog. "Deepwater floater dayrates are approaching or exceeding the $300,000-plus range," Fratt said in a research note. "DO will be able to benefit from the firmness in the deepwater floater market." Shares jumped $1.97, or 3.79%, to $53.93.

Shares of major oil producers inched higher Tuesday.

Exxon Mobil

(XOM) - Get Exxon Mobil Corporation Report

rose 0.22%;


(CVX) - Get Chevron Corporation Report

climbed 0.34%;


(COP) - Get ConocoPhillips Report

rose 0.71%;

Royal Dutch/Shell


increased 0.45%; and


(BP) - Get BP p.l.c. Sponsored ADR Report

rose 0.53%.