Crude Has Another Down Session

The June contract has lost more than 3% this week.
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Updated from 11:40 a.m. EDT

Energy prices fell after refiners increased their run rates and an Energy Department report on crude and gasoline inventories contained few surprises.

Light, sweet crude closed down 95 cents at $71.93 a barrel. After ending above $75 on Friday, the June contract has fallen more than 3% this week following OPEC promises to keep production at record levels and President Bush's move to curtail additions to the strategic petroleum reserve.

"The first round of serious profit-taking may signal oil and gasoline prices might have finally hit its short-term peak," says Phil Flynn, an energy analyst with Alaron Trading in Chicago.

Geopolitical problems have boosted oil prices in recent weeks even though there is plenty of crude in storage. U.S. inventories of crude are currently 6% above last year, at 345 million barrels, after dropping by 200,000 barrels last week, according to the Energy Department's weekly update.

Stockpiles of crude, which is processed into gasoline and heating oil, have been building up at refiners over the past month because many refiners are operating at lower-than-normal rates. Thanks to new fuel requirements and a switch to cleaner, summer gasoline blends, maintenance schedules at refiners have been longer than usual. Refiners raised their run rates 2 percentage points to around 88% of their capacity, according to Wednesday's report.

Increased run rates "should help take off some of the bullish pressure on markets, and help moderate prices a bit in the next week," Rakesh Shankar, an energy analyst at Economy.com says.

Heavy refinery outages have resulted in lower gasoline and distillate supplies. Gasoline inventories are 6% below last year and declined by 1.9 million barrels to 200.6 million barrels, less than analysts polled by

Bloomberg

had expected. Lower supplies have translated into higher prices, which are 23% higher this year. Wholesale gasoline inched up less than 1 cent to $2.13 a gallon.

High gasoline prices have taken a toll on demand. Over the past four weeks, demand is up only 0.3% compared to 2005. But during the same period last year, demand had risen 1.5% over 2004.

"The drop in gasoline demand in response to higher prices could be more stark as gasoline prices edge incessantly higher," says Shankar.

Distillates, which include jet fuel, diesel and heating oil, increased by 1 million barrels to 115.6 million barrels last week. Still, despite heavy refinery outages, distillates are 11% above the same period last year. Mild weather and lower demand for heating has pushed up inventories.

Heating oil lost 4 cents to settle at $2.02 a gallon, and natural gas dipped 6 cents to close at $7.20 per million British thermal units.

Crude prices have been supported by an escalating confrontation with Iran, one of the world's top crude producers, production problems in Nigeria, and stepped up nationalization program in Venezuela. Iran has refused to comply with U.N. demands to stop uranium enrichment and announced plans to expand their efforts. On Wednesday, Iran's Supreme Leader Ayatollah Ali Khamenei said Iran will harm American interests worldwide if the U.S. administration launches military strikes against Iranian nuclear facilities.

The U.S. has pressed for economic sanctions, and rumors abound of potential air attacks. The U.N. Security Council gave Iran until Friday, when it meets to hear a report on the country's nuclear ambitions, to stop enrichment.

Ongoing rebel attacks on Nigeria's oil installations have kept energy prices rising. Crude exports are down by a quarter to 2.5 million barrels and are unlikely to return anytime soon. Security problems have kept

Royal Dutch Shell

(RDS.A)

from bringing 455,000 barrels back to production.

Exxon Mobil

(XOM) - Get Report

officials evacuated non-essential employees Tuesday at an export terminal that processes 650,000 barrels per day, but brought them back to work today.

Venezuelan President Hugo Chavez has raised royalties and taxes on foreign oil companies to reassert government control over the industry. The Venezuelan congress is reportedly mulling plans to increase royalties and taxes on companies operating in the country's Orinoco tar belt. The federal government recently took over 32 privately run oil fields to form joint ventures with state oil company Petroleos de Venezuela.

Total

(TOT) - Get Report

and

Eni

(E) - Get Report

refused to hand over their fields and probably will not receive compensation for them,

The Wall Street Journal

reported Monday.

High crude prices and a boom in production have increased earnings at oil companies this quarter.

ConocoPhillips

(COP) - Get Report

saw net income during the first quarter jump 13% to $3.29 billion, or $2.34 a share. Revenue was $47.9 billion, compared to $38.9 billion during the same period last year. The results were in line with analysts' projections.

Exploration and production income jumped 5% during the quarter, but the gains were offset by a decline in refining and pipeline profits. Lower refining margins and reduced volumes shaved profits as the company's damaged refineries along the Gulf Coast struggled to reopen and meet new gasoline requirements. Refining incomes dropped from $700 million to $390 million, while midstream profits dropped to $110 million from $385 million.

ConocoPhillips shares lost 71 cents to $67.54.

Soaring demand for oil field services sent

Baker Hughes'

(BHI)

first-quarter profits soaring nearly 89% to $339.2 million, or 99 cents per share. Analysts had projected profits of 79 cents per share. Revenue climbed from $1.6 billion to $2.06 billion, surpassing analysts' expectations of $2.03 billion, according to Thomson Financial.

Baker Hughes expects revenue to jump 23% to 25% this year on the backs of increased exploration and production in the oil industry. Shares skyrocketed $3.92 to $79.85.

Exxon Mobil reports earnings on Thursday.