Updated from 2:40 p.m. EDT

Oil closed slightly higher after a choppy session Monday, as trading in the September futures drew to a close and concerns continued about supply disruptions in the Middle East and elsewhere.

Prices were volatile on the last day of trading for the September contract before closing up 10 cents at $65.45 a barrel on Nymex. Gasoline futures dropped 4 cents to $1.86 a gallon. Heating oil fell 1 cent to $1.81 a gallon.

Some exports from Iraq, which produces roughly 2 million barrels a day, reportedly have been halted due to a power outage. It's unclear how much production was shut down, though rumors say the amount wasn't significant.

Last Friday, oil prices soared after two missiles were shot at U.S. ships in the Red Sea, raising more fears over political instability in the Middle East. The missiles hit the Jordanian port Aqaba, which borders Saudi Arabia.

Crude prices were further supported Friday after exports from Ecuador were halted due to local protests against foreign oil companies operating in the region. On Monday, news reports said the Ecuadorian government had seized control of all production facilities after protestors agreed to begin negotiations, but production of roughly 200,000 barrels will probably take about a month to be fully restored. Ecuador exports most of its oil to the U.S.

In the U.S., a refining capacity shortage continues to be on traders' radar. Recent data showed gasoline stocks in the U.S. fell by 5 million barrels, a level at the lower end of the seasonal average.

"Gasoline inventories are uncomfortable," says Larry Goldstein at the Petroleum Industry Research Association. "The market gets nervous about any supply shortage and the resulting high fuel prices are already impacting low-income consumers."

Goldstein maintains that the loss in U.S. gasoline supplies will worsen in the short term, partially due to the newly passed energy bill.

The legislation, which says refineries no longer are required to use the gasoline additive MTBE, is likely to exacerbate a shortage in gasoline because the additive actually increased the volume of gasoline supply.

MTBE was added to gasoline in order to make it burn cleaner, and increased the amount of finished products by basically diluting it. But the additive was also found to have leaked into, and contaminated, water sources, an issue that spurred many legal claims against refiners.

"Since no refiner in its right mind will continue to voluntarily blend MTBE into its product" without liability protection, "the additive will be completely phased out in the next 270 days, which means we will have less gasoline in the market," Goldstein says.

The use of corn-based ethanol is supposed to replace the use of MTBE, but Goldstein said it won't be enough to offset the supply loss in the short term.

As for oil prices, Goldstein believes the MTBE issue will inevitably change refinery economics and push up crude prices. As gasoline becomes more expensive, refineries will pay more to get their hands on the light sweet crude, since it's easier to process.

Among corporate news, China's

National Chinese Petroleum Corp.

said it plans to buy Calgary-based

PetroKazakhstan

(PKZ)

for $4.18 billion, or $55 a share. The Chinese bid aims to secure more oil supplies for the world's second-largest consumer market, after a previous Chinese attempt to acquire

Unocal

(UCL)

hit a U.S. regulatory wall.

PetroKazakhstan produces about 150,000 barrels a day and has operations strategically located in the oil-rich nation of Kazakhstan, a former Soviet state. Shares surged $8.55, or 19%, to $53.95.

Elsewhere, the independent oil and gas producer

Encore Acquisition Co.

(EAC)

said it's acquiring oil and gas assets for $123 million from private sellers. The properties are located Oklahoma, Montana and North Dakota. Encore estimates the area has proven reserves of about 48 billion cubic feet of oil and gas equivalent, and a daily production capacity of 10.5 million cubic feet equivalent. The properties are expected to generate about $29 million of cash flow in 2006.

Shares of Encore rose 82 cents, or 2.8%, to $30.75.

Major oil producers' shares were mixed in late Monday trading, after a brief rally earlier in the session.

Exxon Mobil

(XOM) - Get Report

rose 0.02%,

ConocoPhillips

(COP) - Get Report

dropped 0.3%,

BP

(BP) - Get Report

fell 0.7%, and

Chevron

(CVX) - Get Report

added 0.5%.