Updated from 12:09 p.m. EDT

Oil prices built on their recent gains Thursday, inching above $51 a barrel, as traders continued to react to an Energy Department report showing an unexpected decline in crude inventories.

The July crude contract settled up 3 cents to $51.01 a barrel on Nymex. Gasoline futures fell about 1 cent to $1.44 a gallon.

The Energy Department said Wednesday that U.S. inventories dropped by 1.6 million barrels last week, the first drop in six weeks. The report also showed a 1.9 million-barrel build in distillate stocks and a 600,000-barrel rise in gasoline inventories.

Despite inventories being at their highest levels in six years, the market still jolts on unexpected signs of supply shortage. Many analysts believe volatility in the oil and gas markets is likely to persist for as long as the shortage in spare capacity remains.

Others say market fundamentals are predominantly bearish and expect prices to drop.

"These prices are ludicrous," says Peter Zeihan, energy analyst at Austin, Texas,-based Stratfor consulting group. "It's not sustainable, production is high, inventories are high, everybody is pumping as much as they can, but demand is not able to soak it all up."

"Prices have no where else to go but down," Zeihan said.

OPEC recently said it is accelerating its exploration and production activity to create an additional 3 million barrels a day of spare capacity. Meanwhile, the world has about 1.5 million barrels a day in excess capacity, viewed by many as insufficient.

Algeria's Energy Minister Chakib Khelil said Wednesday that oil prices could rise further in the next few months as increased demand puts pressure on world supplies,

Reuters

reported. He also said that OPEC oil producers would be deterred from reducing current oil production out of fear it might cause prices to go up.

Raymond James reported Thursday that oil finally began flowing from the Caspian Sea though a 1,100-mile pipeline that took 10 years to build. The pipeline, built by a

BP

(BP) - Get Report

-led consortium, takes oil from Azerbaijan, though Georgia and into a Turkish port to be shipped into the international market.

Pavel Molchanov at Raymond James said the pipeline will add about 1 million barrels a day of new oil by early 2006. "This is new oil coming into the global market, which will boost overall supplies on the margin, but will be partially offset by production declines in the U.S. and the Northern Sea," Molchanov said.

In corporate news,

Exxon Mobil

(XOM) - Get Report

said it plans to go ahead with a $3 billion petrochemical project in Venezuela, after its public objections to the Venezuelan government's tax increases raised doubts on whether it will continue investing in that country, the

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AP

reported.

Julio Medina, a planning manager at Pequiven, the petrochemicals unit of state-owned Petroleos de Venezuela, said the two companies will each own 50% in the project, which is set to begin in 2008, the

AP

reported. The Venezuelan government recently raised its taxes on foreign producers that upgrade heavy sour crude into lighter crude to 16.6%, up from 1%.

Shares of

Parker Drilling

(PKD) - Get Report

jumped 7.6% after it said its fiscal fourth quarter revenue increased by 66% to $55.4 million. Net income rose to $5.5 million, or 14 cents a share, from $409,000, or 2 cents a share, last year. Analysts had been forecasting earnings of 13 cents a share. The company said its strong earning were driven by a 12% increase in average rig dayrates and 62% growth in its rig-count. It expects rates to improve by 10% in each of the next two quarters.

Occidental Petroleum

(OXY) - Get Report

shares rose after it got positive reviews from analysts. Goldman Sachs's Arjun Murti raised his rating for the exploration and production company to outperform from in-line.

Carmine Rositano, energy equity research analyst at PIRA, said Occidental was one of his favorite picks. "The company has a good production growth, and its financials mirror the major produces with good cash flexibility," he said. He does not own shares of Occidental. Shares added $1.10, or 1.54%, to $72.59.

Shares of major oil producers were mostly higher. Exxon Mobil rose 0.90%;

Chevron

(CVX) - Get Report

gained 0.58%;

ConocoPhillips

(COP) - Get Report

fell 0.27%;

Royal Dutch/Shell

( RD) rose 0.10%; and BP added 0.58%.