Updated from 11:08 a.m. EDT

Oil fell again Thursday after the U.S. offered to negotiate directly with Iran over its nuclear program and OPEC officials decided to maintain record production.

Light, sweet crude for July delivery lost 95 cents to settle at $70.34 a barrel. On Wednesday, the contract fell to a one-week low of $71.29. Trading has been choppy, with futures rising and falling on inflation worries and negotiations with Iran, the world's fourth-largest crude producer.

Energy shares were gaining on crude's pullback, with the Amex Oil Index and the Philadelphia Oil Service Index picking up 1%.

Traders closely followed OPEC's meeting Thursday in Caracas, where members opted to keep production at full capacity in a bid to keep global supplies high and help drive down prices. The group, which produces 40% of the world's crude, has been pumping 28 million barrels of crude per day for the past 10 months. OPEC likely won't tinker with quotas until after the hurricane season ends in November.

Venezuela President Hugo Chavez called once again for limiting production and suggested there be a floor of $50 a barrel for oil. In the run-up to every OPEC meeting, Chavez routinely says output should be cut because he wants to maximize his country's oil revenue.

But his comments never stick because Venezuela is producing 700,000 fewer barrel than its quota of 3.2 million barrels. The country's output has never fully recovered from a 2002 strike that crippled its oil industry.

Production losses in Indonesia, Venezuela and Nigeria, where rebels have attacked the country's oil industry, have kept OPEC from increasing output. This year, volume in the African nation is down around 500,000 to about 2.4 million barrels per day. Nigeria may get some relief in the coming weeks when about 160,000 barrels of crude are expected to return to the market, Edmund Daukoro, the country's oil minister, said Wednesday.

The specter of reduced exports from Iran has also injected more fear into the markets and propped up energy prices. Iran restarted small-scale uranium enrichment in February and has thus far refused to halt the program despite threats of economic sanctions and military strikes.

The rhetoric between Washington and Tehran has died down somewhat this week, with a U.S. offer to negotiate directly with the Iranians if they halted their nuclear activities. The U.S. said it would join talks with Iran on the proviso that Russia and China would not oppose sanctions if talks fall apart.

"For the market, if Iran decides to eventually accept the offer, tensions will ease and oil prices will fall," said Bill O'Grady, Assistant Director of Market Analysis at A.G. Edwards in St. Louis. "On the other hand, should diplomatic efforts fail, the path to war opens further."

On Thursday, Iran's foreign minister said Tehran would talk with the U.S., but said Iran would not halt its nuclear program. Meanwhile, U.S. Secretary of State Condoleezza Rice is meeting with European and Chinese diplomats in Vienna today to discuss an incentive package if Iran cuts its program.

However, oil prices could quickly reverse and gain ground on strong comments from Iran or OPEC ministers.

"We continue to see considerable upside risk for oil as the hurricane season starts in earnest, nuclear talks with Iran take many turns and as OPEC talks tough on prices," said Bart Melek, senior economist at BMO Nesbitt Burns in Toronto. "Furthermore, based on Iran's past explosive rhetoric, it is more than likely that Iran will reject the U.S. overture in a dramatic fashion."

The U.S. Energy Department's weekly petroleum report, released at 10:30 a.m. EDT, contributed to the bearish tone. The update was delayed a day because of a federal holiday on Monday.

According to the report, stockpiles of gasoline rose 800,000 barrels to 209.3 million barrels last week, reflecting record imports. Imports averaged 1.6 million barrels per day for the week, the third highest level ever. Wholesale gasoline prices climbed 3 cent to $2.12 a gallon.

Distillates, refined products that include heating oil and jet fuel, jumped by 1.8 million barrels to 118.9 million barrels. Although production dropped last week, imports made up the difference. Supplies are currently 8% above a year ago, and helped drive down heating oil prices by 3 cents to $1.97 a gallon.

Refining capacity soared to its highest levels since August at 91.4%, up from 89.7% last week. A pickup in refining capacity will ease concerns among traders that a slower-than-usual recovery in operations would result in gasoline shortages in the midst of the peak summer driving season.

Higher gasoline supplies would help meet peak demand during the summer driving season that began on Monday. Thanks to a switch to ethanol and summer blends of gasoline, refiners have been slower to increase production, giving rise to concerns of a gasoline shortage this summer.

Demand for gasoline rose nearly 1% over the past four weeks. The start of summer and lower prices may have contributed to some of the pickup. Prices for regular gasoline have fallen from an average of $2.94 per gallon for the week of May 15, to $2.86 per gallon last week.

Crude, which is processed into gasoline and other products, was expected to drop by 1 million barrels in a

Bloomberg

poll of analysts, but in fact rose 1.6 million barrels last week. Surging imports of 10.8 million barrels per day, a daily increase of 1.3 million barrels was behind the rise.

At 345.5 million barrels, crude inventories are 4% higher than last year. However, they could quickly be wiped out in the event of another strong hurricane. Today marks the first day of the U.S. hurricane season, and 22% of the Gulf of Mexico's oil production still remains offline.

Warming weather propped up natural gas prices, despite a supply glut, by 6 cents to $6.45 per million British thermal units. Inventories are up 27% over last year and 46% above the five-year average. Last week, inventories climbed 80 billion cubic feet to 2.2 trillion cubic feet.

This summer, natural gas prices will likely be lower thanks to milder temperatures. Demand is projected to come in 0.2% lower than last summer, according to the Natural Gas Supply Association's summer outlook released on Wednesday. By November, when the cooling season ends, supplies are projected to touch 3.5 trillion cubic feet, 290 billion cubic feet more than last year.

In trading Thursday,

National Oilwell Varco

(NOV) - Get Report

,

Weatherford International

(WFT) - Get Report

and

Rowan Companies

(RDC)

were propping up the Philadelphia Oil Service Index.

Oil producers

Marathon Oil

(MRO) - Get Report

,

Sunoco

(SUN) - Get Report

and

Total

(TOT) - Get Report

were leading the increase on the Amex Oil Index.