Updated from 1:19 p.m. EDT

Oil futures fell Wednesday but gasoline continued its upward march Wednesday as the U.S. government said it would tap the strategic petroleum reserve in the wake of Hurricane Katrina.

Crude for October delivery, which was above $70 a barrel in overnight trading, closed down 87 cents to $68.94 on Nymex. The contract is still up more than 60% this year and about 4% since the storm struck Monday.

Earlier, the Energy Department confirmed it will lend crude oil from the strategic petroleum reserve to at least one company affected by the storm. It will consider other requests as they arrive, according to Energy Secretary Sam Bodman.

The government recently completed restocking the reserve with 700 million barrels of crude. An influx of government oil into the market could compensate for the loss of roughly 1.5 million barrels a day of crude production from the Gulf and for the loss of some 1.2 million barrels a day of imported crude through Louisiana's port.

News of the SPR release did little to ease the immediate pressures in gasoline markets, where the loss of eight major refineries has ignited a major rally. Gasoline for September delivery jumped 20% in frenzied action Tuesday and closed up another 7.5 cents to $2.55 a gallon on Nymex. Trading was frantic on the last day of the September contract.

Retail unleaded gasoline hit record highs at the pump in various parts of the country, in some areas going above $3 a gallon.

Even before Katrina, gasoline stocks were at the bottom of their seasonal average. Nearly 2 million barrels of daily refining capacity have been stymied by the storm.

Jim Williams, an analyst at WTRG Economics, believes tapping the SPR reserves is the right solution and could eventually bring down gasoline prices. "The SPR can replace the lost crude oil supply from the ports and pipelines, so that refineries can start up production again."

Williams says that a refiner needs enough supply of crude before it can start operating. "You don't want to turn on a refinery knowing that you only have a couple days' supply," he says.

"We are seeing some evidence of gasoline shortages in certain areas in the country, which means that we could be facing a few days of panic. But prices will start easing on the gasoline front once pipelines and refineries start coming back on line," Williams said.

The Energy Department also released its inventory report for the week ended Aug. 26, showing crude stocks fell by 1.5 million barrels, while gasoline inventories for that week were down by 500,000 barrels, less than the 1.6 million-barrel drop analysts were expecting. Distillates stocks, which include heating oil and diesel, increased by 2.7 million barrels.

At the end of the summer, refineries tend to increase winter fuel production and focus less on gasoline. Many analysts are concerned that with the unexpected loss in gasoline production, refineries will be even more strained to keep up with winter demand.

"The rise in gasoline prices is totally rational. We need every bit of 50 cents or more to balance out the supply and demand," says Larry Goldstein at the Petroleum Industry Research Association.

The market has lost 1 million barrels of gasoline a day, according to Goldstein. He expects some of the refineries to take months, not days or weeks, to return to operation. "We are hearing that some refineries were seriously damaged, and obviously they aren't bragging about it, but this is going to result in long-lasting high prices."

Goldstein further estimates that gasoline, diesel and jet fuel prices are all going to rise significantly, and for a long period, since the U.S. will be forced to import more products. "The hangover effect of Katrina will last long after refineries resume operation, because they were already lacking spare capacity before the storm, and they can't go any faster to make up for the losses."

Valero Energy

(VLO) - Get Report

, whose shares are up 18% this week, said Tuesday that its 245,000 barrel-a-day refinery in St. Charles, La., will require up to two weeks to repair.

The Amex Oil Index surged 2.5% Wednesday as shares of the major producers rallied.

Exxon Mobil

(XOM) - Get Report

gained 1.7%,

ConocoPhillips

(COP) - Get Report

rose 1.6%,

BP

(BP) - Get Report

increased 1.7%, and

Chevron

(CVX) - Get Report

added 1.5%.

Shares of offshore service and equipment providers continued to rise Wednesday.

National Oilwell Varco

(NOV) - Get Report

, which sells equipment and components and provides oilfield subsea inspection services rose 5.2% to $63.03.

Tidewater

(TDW) - Get Report

which provides offshore supply vessels and marine support services, spiked for the second day by 7.7% to $44.28.