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Oil Gains After Inventories

Crude inventories jump, but distillate supplies fall ahead of the winter heating season.

Updated from 4:12 p.m. EDT

Oil futures gained ground Thursday after a report from the Department of Energy showed a larger-than-expected drop in distillate supplies ahead of the winter heating season.

Domestic stockpiles of crude, gasoline, natural gas and distillates are 7% to 18% above where they were a year ago and remained high in the agency's weekly supply report Thursday. The update came out a day later than normal because of a federal holiday on Monday.

Crude stockpiles climbed by 2.4 million barrels last week, nearly double analysts' predictions, as refiners decreased production of gasoline and distillates to undergo seasonal maintenance. Refiners operated at 89.2%, down from 89.9%.

Distillates declined by 1.6 million barrels, far outdistancing the predicted drop of 125,000 barrels. Stockpiles of unleaded gasoline dropped by 300,000 barrels to 215.4 million barrels last week. Despite the fall, inventories of gasoline are over 9% higher than at the same period last year, and distillates are more than 17% greater.

Mild temperatures and low heating demand pushed inventories of natural gas up by 62 billion cubic feet to 3.38 trillion cubic feet. There is now 14% more natural gas than last year and 12% more than the five-year average. Natural gas is used to power some utilities.

Light, sweet crude for November delivery gained 27 cents to settle at $57.86 a barrel. The front-month contract dipped to as low as $57.22 in reaction to higher-than-expected crude inventories.

Heating oil and unleaded gasoline each added 1 cent to $1.68 a gallon and $1.45 a gallon, respectively. Natural gas shed 37 cents, or 6%, to $5.78 per million British thermal units.

Crude prices have lost all of their gains this year as fuel inventories mounted, weather grew mild and tensions in the Middle East cooled. OPEC's apparent confusion over how it will trim production has also thrown the energy markets into a tailspin and driven down prices.

On Wednesday, the front-month contract crude fell to a nine-month low of $57.59 after the International Energy Agency trimmed demand projections for this year and next.

Thanks to high oil and natural gas prices, and temperate weather, demand for global crude will be 84.57 million barrels per day, down 110,000 from the IEA's previous forecast. Next year, consumption is expected at 86.02 million barrels, a downward revision of 200,000 barrels.

Meanwhile, OPEC has agreed to a daily reduction of one million barrels starting next month, but its 11 member countries are still haggling over how to divvy up the cut and whether Saudi Arabia, the biggest producer, will go along with it.

The kingdom's biggest oil producer, Saudi Aramco, has vowed to continue shipping crude to all of its Asian and European customers in November.

The group, which sets quotas to maintain production and prices worldwide, is trying to decide whether to trim its daily level of 28 million barrels or actual production of 27.5 million barrels. OPEC has immense power over global crude markets because its member pump about 40% of the world's crude.

This is the first time that OPEC, which has been pumping at record amounts, has shaved output in nearly two years. When OPEC slashed output by 1 million barrels in Dec. 2004, crude prices quickly shot up. The same could occur again.

Energy shares were able to maintain gains despite the crude inventory data and picked up as much as 2% on the Amex Oil, Philadelphia Oil Service and Amex Natural Gas Indices.

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were among the leaders in recent trading.

Meanwhile,

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dissolved its merger announcement with

Stone Energy

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and will pay the independent oil company an $8 million termination fee. Energy Partners will consider other options to boost shareholder value, among them the possible sale of the company.

In June, Energy Partners beat out

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In recent trading, Energy Partners shares were up 3.4%, Stone Energy was higher by 3% and Plains Exploration was up 1.7%.

Daily production at

BP's

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Prudhoe Bay oil field in Alaska rose to 50,000 barrels Thursday and was expected to return to 350,000 barrels within a few days, the

Associated Press

reported. On Tuesday, heavy winds and rains shut down much of the field's power and trimmed output to as low as 20,000 barrels, according to published reports.

BP shares rose 1.9% to $65.07 Thursday.