Updated from 1:39 p.m. EDT

Oil ended lower Thursday on concerns that the London terrorist bombings will crimp energy demand in coming months. A government report showing sharply higher distillate inventories contributed to the selling.

August crude closed down 55 cents to $60.73 a barrel on Nymex, reversing an overnight surge fed by concerns about Hurricane Dennis in the Gulf of Mexico. The contract went as high as $62.10 -- a new record -- just prior to the London blasts, and as low as $57.20 in their immediate aftermath. It spent most of Thursday down more than $1 before recovering late in the day.

Heating oil slid 2 cents to $1.77 a gallon, and gasoline futures ended 2 cents higher at $1.80 a gallon, another record high.

Dozens of people are believed dead in at least four explosions that ripped London's public transportation system during the morning rush hour. Prime Minister Blair blamed terrorists for the blasts, which led to steep losses on European stock markets and raised fears that worldwide travel will fall off.

"This event has no effect on the supply side, but it may affect demand, especially for jet fuel," said John Felmy, economist at the American Petroleum Institute.

"Oil's dip is part of a lot of knee-jerk reactions, seeing as it was a terrorists attack on the transportation sector," said Bryan Piskorowski, market analyst with Wachovia Securities. "Plus, you have Hurricane Dennis floating around -- it's going to be threatening oil refineries."

The storm, which comes on the heels of Tropical Storm Cindy, is reportedly strengthening as it moves toward Jamaica at a Category 2 status. Forecasts say Dennis could make landfall in the U.S. within three days, with the best guesses ranging from Florida to Louisiana.

The API's Felmy said that the storm's path looks similar to that of Hurricane Ivan, which battered the Gulf Coast last year. He noted that the first casualty could be


(CVX) - Get Report

refinery in Pasca Goula, Miss., which produces 300,000 barrels a day.

Further complicating the energy picture was a mixed inventory report Thursday from the U.S. government.

In the week ended July 1, the Energy Department said, crude stocks dropped by 3.6 million barrels, roughly twice the decline foreseen by analysts. But distillate inventories, which include heating oil and jet fuel, rose by 4 million barrels, about twice the gain.

Demand figures remained above average. Demand for distillates was 6% higher than the same time a year ago, while jet fuel consumption jumped by a whopping 5.5% compared with a year earlier.

Refineries stretched production to nearly maximum capacity at 98.1%, yielding 4.5 million barrels a day of distillates, the highest production level ever. Increased refining activity also explains the large draw in crude inventories.

In company news, shares of

Murphy Oil

(MUR) - Get Report

rose for the second day after raising its second-quarter earnings guidance to a range of $1.19 to $1.22 a share before asset sale gains, driven by its refining and marketing division. That would beat analysts' average earnings forecasts of $1.01 a share, according to Thomson First Call.

As for Murphy Oil's storm exposure, two production facilities in the Gulf's deep water that were shut down ahead of Tropical Strom Cindy, are back in operation, but will probably close again if Dennis approaches. Combined, the two facilities produce 80,000 barrels of oil and 75 million cubic feet of natural gas a day, according to Mindy West, a company spokesperson.


FMC Technologies

(FTI) - Get Report

was awarded a $25 million contract to provide two subsea systems to

Norsk Hydro ASA

( NHY). Despite the news, its shares fell, along with the rest of the oil service sector, by 24 cents to $31.97.

Rowan Cos.

( RD) said Thursday that it has entered a deal to provide two new drilling rig kits to Scorpion Offshore. It expects revenue of about $55 million from the contract. Still, shares dropped 1.3% to $30.90.

One company shining through the red Thursday is the independent gas and oil producer

Southwestern Energy

(SWN) - Get Report

, which said on Wednesday that it purchased five new land drilling rigs for $37.7 million. The rigs will be capable of drilling both vertical and horizontal wells in the company's Fayetteville Shale play. CEO Harold Korell said the new rigs "have design features that are optimal for faster drilling and mobilization ... which will allow us to accelerate the pace of development of the Fayetteville Shale play in 2006." Shares climbed 5.7% to $53.20.

Among the major oil producers, shares pared earlier losses and were headed for a mixed close.

Exxon Mobil

(XOM) - Get Report

gained 0.1%, Chevron rose 0.6%,


(COP) - Get Report

added 0.6%,

Royal Dutch/Shell


lost 1% and


(BP) - Get Report

slid 0.5%.