Crude Prices Fall Again

The June contract is down 5% from its high of Friday.
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Updated from 1:02 p.m. EDT

Oil prices extended their decline to a fourth session Thursday following a surprise increase in Chinese interest rates and data showing weaker gasoline demand and higher refinery production.

Light, sweet crude closed down 96 cents at a two-week low of $70.97 a barrel on Nymex. Unleaded gasoline, which often moves in tandem with oil, shed 6 cents to settle at $2.07 a gallon. June crude has lost much of its gains from last week and is down 5% since closing at $75.15 on Friday.

For the first time since October 2004, China's central bank increased its benchmark interest rate Thursday, raising it to 5.85%. Chinese energy demand has propped up energy prices and slashed world supplies. During the first quarter, Chinese crude imports were 272 million barrels, up 25% from last year,

Bloomberg

reported.

Last week, U.S. refiners operated at their highest rate since January as more shuttered units came back online. Refineries have been closed for longer than usual this year to phase out an additive linked to water pollution and to accommodate the seasonal switch to cleaner, summer blends of gasoline.

With more refineries running, more gasoline was produced. Although inventories fell 1.9 million barrels last week, it was less than the 3 million-barrel drop analysts polled by

Bloomberg

had predicted. Gasoline supplies are nearly 6% below last year.

Rising crude prices and new fuel requirements have boosted gasoline prices 22% this year. Gasoline prices usually jump in the spring as refiners start making summer blends, but the increase has been higher this year. Refiners are struggling to drain their tanks of gasoline laced with methyl tertiary butyl ether for gasoline reformulated with ethanol by May 5, when their protection from MTBE lawsuits ends.

High gasoline prices have shaved demand. Over the past four weeks, demand has inched up just 0.3% over the same period a year ago. At this time last year, demand was up 1.5% over 2004.

Gasoline prices have eased 8 cents since President Bush's announcement Tuesday to temporarily cut oil shipments to the country's strategic petroleum reserve. Bush also said he would let regulators relax certain clean-fuel regulations. Still, the move is unlikely to drive down gasoline prices that much because many refiners have already switched over to ethanol.

"I would be surprised to switch much at this point," said Henry Hubble, vice president of investor relations at

Exxon Mobil

(XOM) - Get Report

, in a conference call this morning. "Imports may benefit, but I don't see domestic supplies benefiting that much."

Exxon Mobil expects to finish its conversion to ethanol by the end of this month. European and Asian gasoline imports, which largely have MTBE, were expected to drop following the changeover next week.

Gasoline prices could fall as more refiners return to normal operation after repairing hurricane-damaged units and finish seasonal maintenance and the ethanol conversion. Still, gasoline prices could rise along with crude if supply problems persist in Nigeria and Iran cuts exports.

Rebels have shaved Nigerian crude production by 25%, or around 500,000 barrels a day, much of it from

Royal Dutch Shell

(RDS.A)

. Shell had expected to return 455,000 barrels of daily output to production, but security concerns have stalled those efforts. More crude may be lost if militants follow through on their promise to increase attacks.

Iran's standoff with the U.N. Security Council over its nuclear ambitions have also propped up crude prices. Tehran has until Friday, when the council meets to discuss its strategy with Iran, to cease nuclear development, but is unlikely to do so. Economic sanctions or military strikes are two options that have been floated to punish one of the world's largest crude producers.

High crude prices drove up earnings for energy companies during the first quarter. Exxon Mobil saw net income rise nearly 7% to $8.4 billion, or $1.37 per share, including a 4-cents-a-share charge. The results fell short of analysts' expectations of $1.47 a share, according to Thomson First Call.

Revenue climbed 8.3% to $88.9 billion, but fell from $100 billion in the fourth quarter. Exxon shares fell 37 cents to $62.73.

Apache Energy

(APA) - Get Report

, an independent oil company, said earnings rose 18% to $660 million, or $1.97 a share, and revenue climbed 20% to $2 billion on higher oil prices. But profits missed forecasts of earnings of $2.12 a share. Apache shares were last down 68 cents at $71.70.

A warm winter and lower heating demand has boosted stockpiles of heating oil and natural gas. This year, distillates are up 11% and natural gas is 32% higher. Compared to the past five years, natural gas is up 62%, according to the U.S. Energy Department's weekly update.

Natural gas inventories rose 80 billion cubic feet to 1.8 trillion cubic feet last week. In April, utilities typically boost their stockpiles of natural gas in preparation for the winter heating season. Although utilities have been withdrawing natural gas until two weeks ago, stockpiles are high because of warm weather and low demand.

Natural gas fell 47 cents to a close of $6.80 per million British thermal units, and heating oil inched down 4 cents to settle at $1.98 a gallon. Despite the drop in natural gas prices, they likely will creep back up as the weather warms up and people crank up their air conditioners.

"The possibility of a warmer-than-expected summer and high crude oil prices will help maintain a floor on natural gas prices," said Rakesh Shankar, an energy analyst at Economy.com in West Chester, Pa.