Updated from 12:19 p.m. EDT
Oil prices pushed past $70 a barrel Tuesday after the U.S. said a letter to President Bush from Iran's president held no new proposals to end the impasse over the country's nuclear program.
Light, sweet crude for June delivery added 92 cents to close at $70.69 a barrel on Nymex. Wholesale gasoline, which often moves in line with oil, gained 4 cents to $2.04 a gallon.
Oil futures sagged to a three-week low Monday after the Iranian president hinted he had "new solutions" to the stalemate over Tehran's nuclear activities. It was the first letter an Iranian president has sent his counterpart since the Iranian revolution in 1979.
But the 18-page letter, which focused on religion and philosophy, "isn't addressing the issues that we're dealing with in a concrete way," U.S. Secretary of State Condoleezza Rice said Monday, the
The letter criticized the U.S. handling of Iraq and urged U.S. President Bush to follow religious principles. The White House said Tuesday it would not respond to the letter.
"It appears that the letter from Iranian President Ahmadinejad to President Bush was a negotiating ploy, devised to divert attention from the U.N. Security Council meetings on the Iran nuclear issue," said Bill O'Grady, Assistant Director of Market Analysis at A.G. Edwards in St. Louis.
Iran announced the letter's existence before the five permanent members of the U.N. Security Council and Germany met to discuss a resolution urging Iran to halt uranium enrichment. They have also advocated slapping a trade embargo against Tehran.
Iran, the second-largest OPEC producer, restarted uranium enrichment in February ostensibly to produce more electricity for its growing population. The West, though, believes program is a cover for weapons development. Although Iran was referred to the U.N. Security Council over its defiance, the group has yet to take a tough line.
China, Russia and other members of the 15-member Security Council have opposed any strict measures against Iran and have forced a redraft of a resolution against Tehran, the U.K. ambassador to the U.N. said Monday.
Nigerian militants, whose attacks on the country's petroleum installations have driven down crude production by a quarter, rejected a ceasefire on Monday. Instead, they promised a renewed campaign of violence,
reported. Over the past five months, rebels have kidnapped oil workers and blown up pipelines in a bid to gain a share of the country's petrodollars for the people of the oil-rich Niger River Delta, the source of much of Nigeria's crude.
Oil giants, like
Royal Dutch Shell
have been hit the hardest and suffered a loss of 455,000 barrels of crude per day, and have said they will not restart production until their workers' security can be assured.
Although geopolitical problems have pushed oil prices up 14.5% this year, current supplies should be sufficient to meet short-term problems. Oil inventories rose to 346.7 million barrels for the week ended April 28 and are 5% above the five-year average.
The Energy Department will update the inventory statistics Wednesday morning. Crude supplies likely fell by 575,000 barrels last week, according to analysts polled by
, as refiners increased their processing capacities. Oil, which is refined into gasoline and heating oil, has been building up at many refineries racing to switch over to cleaner, summer blends of gasoline and to phase methyl tertiary butyl ether, or MTBE, out of gasoline. Refiners, which had until last Friday to make the change, are now using ethanol in place of MTBE.
The average price for retail gasoline has surged 17% since March, largely because of the switch to ethanol. There were short-term shortages scattered across the country, but those disruptions are now over, U.S. Energy Secretary Samuel Bodman said Tuesday.
"To my knowledge, MTBE has been phased out in its entirety, and we are now operating with total dependence on ethanol," said Bodman,
With the change to ethanol complete, gasoline production is expected to rise in the coming weeks as refiners come back online. Lower supplies of gasoline with MTBE were behind much of the recent price spike.
Gasoline supplies probably rose by 1 million barrels from 202.7 million barrels last week amid a recovery in refinery operations. Refiners likely operated at 89.5% last week, up 0.75%.
The federal Energy Information Administration expects retail gasoline prices to average $2.71 per gallon ths summer, 9 cents higher than last month's forecast and 34 cents higher than last year. But fuel prices are expected to drop in September as hurricane-damaged platforms, pipelines and refineries return to full production.
Despite higher processing rates at refiners, inventories of distillates, which are made from crude and include heating oil, likely dropped by 375,000 barrels last week. Still, distillate output usually falls in the spring as the weather warms up and heating demand drops. An expected drop in production was underpinning a 4 cent-increase in heating oil prices to $1.99 a gallon.
Large stockpiles and mild weather has dampened natural gas prices, which were down 12 cents at $6.58 per million British thermal units. There is 31% more of the heating fuel in storage than last year.
The Energy Department expects natural gas prices to average $8.11 per million British thermal units in the late summer and early fall, down 90 cents from 2005.
The rally in crude helped push up energy stocks Tuesday, with the Amex Oil Index and the Philadelphia Oil Service Index each rising 1%.
The leaders in the Amex Oil Index included
, the country's largest refiner,
shares jumped $4.26, or 4%, to $109.98 after the oil company increased its capital sending 16%, or $250 million for onshore and deepwater production. Kerr-McGee will allocate an additional $170 million to speed up drilling in onshore production and $80 million for deepwater fields in the Gulf of Mexico.
The increased spending will raise expected output 7% to 12% over the next three years. Production is projected to come in between 240,000 barrels and 255,000 barrels.