Updated from 12:01 p.m. EST

Oil prices climbed Monday as traders were forced to contend with tight crude supplies in Nigeria, Iran's military exercises in the Persian Gulf and declining gasoline inventories ahead of the summer driving season in the U.S.

Light, sweet crude for May delivery added 11 cents to close at $66.74 a barrel after clearing $67 earlier this afternoon. The spike in crude prices comes even though supplies are at their highest point in seven years at 340.7 million barrels.

With the second quarter now under way, analysts expect to see a large inflow of money from hedge funds and pension funds as they reallocate their investments. New money in the market will likely keep oil prices volatile.

"The commodity funds and speculators can't seem to stray too far from the oil complex as they feel the market is heading for some possible supply imbalances," said Phil Flynn, an energy analyst with Alaron Trading in Chicago. "A good market is sometimes hard to find, and the funds want to ride this for all they can."

A shutdown of Nigerian crude has kept traders on edge. Nigerian rebels, who want a share of the country's oil wealth, have blasted pipelines and kidnapped foreign oil workers to pressure and destabilize the central government, which derives more than half of its budget from oil, this year. Militant attacks have shaved that country's daily crude output by 27%, or 641,000 barrels.

The attacks have hit foreign oil companies the hardest, most noticeably

Royal Dutch Shell

( RDS-A). The Netherlands-based company has lost around 455,000 barrels of crude per day, but the oil giant has refused to restart production until the safety of its workers can be guaranteed. Nigeria's oil minister said Shell had told him it would take a month to bring output back online,

Dow Jones

reported.

Nigerian crude has become increasingly important to the U.S., which wants to reduce its dependence on Middle Eastern oil. About 15% of American oil comes from Nigeria, and that figure is expected to grow to 25% within a decade. Oil from Nigeria is particularly prized because it's low in sulfur, making it cheaper and easier to refine.

Last Friday, Iran began several days of war games in the Persian Gulf and said this weekend that it was testing a speedy new torpedo. That development followed the country's statement that it had tested a radar-avoiding surface-fired missile. More missile tests are planned this week.

The U.S.-Iran relationship has been marked by mutual distrust for more than a quarter-century, and any escalation in tension can mean higher oil prices. Iran not only is the second-biggest OPEC producer, but also controls the Straits of Hormuz, through which many of the world's oil tankers travel.

The West has already been agitated by Tehran's resumption of small-scale uranium enrichment. Iran says it wants to generate nuclear power for its growing population, not to make an atomic bomb. The U.N. Security Council voted unanimously last week to urge Iran to cease enriching uranium, and it has toyed with possible economic sanctions against the country. A trade embargo would likely not happen, though, because it would drive up crude prices and reduce world inventories.

Venezuela's campaign to bring its petroleum industry under state control has also roiled the energy markets. The government took over one of

Total's

(TOT) - Get Report

oil fields on Sunday after the French oil producer refused to turn it over to a state-owned joint venture. The 30,000-barrel-a-day field is among 32 fields that Venezuela has said must be run by the government.

Over the weekend, Italian oil firm

Eni SpA

(E) - Get Report

also lost control of its Daconian oil field and its daily output of 65,000 barrels.

Last week, Venezuela said

Exxon Mobil

(XOM) - Get Report

was no longer welcome in the country because the world's largest publicly traded oil company has openly criticized higher royalties, taxes and contract changes. Exxon sold one of its fields to its partner,

Repsol YPF S.A.

( REP) last month.

Other oil companies, like Repsol and Shell, signed agreements on Friday to turn over control of a number of privately run oil fields to a state-run joint venture.

New money pouring into the market has also helped to push up crude prices. Over the past two weeks, hedge funds have sunk more money into contracts for light, sweet crude, increasing their long positions. Open interest, or the number of outstanding contracts held at the end of each day, rose 7,585 to 936,136.

"Open interest has been expanding of late, and funds, having missed most of the recent rally by being short, are now net long," said Edward Meir, an energy analyst with Man Financial in Darien, Conn. "This bodes well for further gains."

Long positions climbed 6,318 to 135,158 as of March 28. Net-short positions stand at 127,940, according to the Commodity Futures Trading Commission, the regulator of the futures and options markets.

Unleaded gasoline settled down 2 cents to $1.86 a gallon on Monday. Last week, gasoline hit a five-month high of $1.99 a gallon after supplies fell by 5.4 million barrels to 216.2 million barrels. Although it was the largest drop since August 2003, inventories remain slightly above last year.

The energy markets have been worried that refiners won't be able to produce enough reformulated gasoline because of heavy maintenance schedules and new fuel requirements. By May 31, refiners have to phase out methyl tertiary butyl ether, a gasoline additive linked to water pollution, and produce gasoline that can be blended with ethanol. Still, concern exists that there won't be enough ethanol to meet demand.

As they retool to produce gas for summer driving, refineries are operating at 87% of their capacity, compared with 91% last year, the U.S. Energy Department reported last week. When refiners are processing less crude, supplies of gasoline and distillates fall and crude builds up.

Heating oil inched down less than 1 cent to finish trading at $1.86 a gallon. Last week, the U.S. Energy Department reported distillate stockpiles fell 2.5 million barrels to 124.2 million barrels.

Utilities and manufacturers switching over to natural gas from fuel oil has supported natural gas prices. The increase comes despite surplus inventories boosted by record mild weather. Natural gas is used to heat homes and businesses.

On Monday, natural gas climbed 3 cents to close at $7.24 per million British thermal units.

"Higher than normal inventories are the primary reason behind the failure of gas to follow the $1.89 annual increase in crude," said Jim Williams, an energy analyst with WTRG Economics.

Natural gas prices, though, should remain relatively low because of higher-than-average inventories. Typically, pipeline operators and distributors start adding to their stockpiles during the summer to prepare for the following winter heating season. But this year, storage operators will have to add 1.7 billion cubic feet less than last year, according to Williams, and "this implies lower natural gas prices."

In trading Monday, shares of

ConocoPhillips

(COP) - Get Report

surged $1.72 to $64.87 after two investment firms restarted coverage of the country's largest refiner. Morgan Stanley resumed coverage of the stock, with profits estimated to climb from 8% to 10% a year through 2008. A price target of $80 was set and the stock rated "overweight" or buy. Goldman Sachs rated the stock "outperform" and gave $84 as a price target.