Updated from 11:49 a.m. EDT

Oil prices climbed Friday after a senior official in Iraq's Oil Ministry was kidnapped, undermining hopes the death of an al-Qaeda leader would curtail insurgent attacks.

Light, sweet crude for July delivery added $1.28 to settle at $71.63 a barrel after two days of declines, sparked by the killing of al-Qaeda leader Abu Musab al-Zarqawi in an American air raid and improving relations with Iran.

Energy shares were down as inflation worries gripped the market once again. The U.S. trade deficit in April jumped 2.5% to $63.4 billion largely due to soaring energy prices, the Commerce Department said Friday. Still, the deficit was narrower than the $65 billion figure analysts had expected.

The director general of the State Company for Oil Projects, which is heading up new refinery projects across Iraq, was abducted on his way home from work yesterday. Muthana al-Badri joins a number of oil officials who have been abducted by rebels.

Although Iraq has the world's third-largest oil reserves, insurgent attacks on the country's pipelines and refineries over the past three years have driven down crude production by 22% to 1.9 million barrels per day. Smugglers routinely target the country's oil infrastructure so they can sell oil and petroleum products on the black market.

Oil prices rise and fall on news of production problems and threats to world oil supplies. This year, energy prices have increased 18% on the nuclear standoff with Iran, output cuts and kidnappings in Nigeria and a nationalization campaign in Venezuela.

European negotiators presented Iran with an incentives proposal designed to persuade Iran to halt its nuclear program. While Iranian officials said the proposal was positive, on Thursday they made fresh supplies of nuclear fuel. The West is incensed Iran restarted uranium enrichment in defiance of U.N. resolutions and has vowed to continue it, ostensibly for civilian purposes.

In Nigeria, five South Korean and one Nigerian oil workers kidnapped from a natural gas plant operated by

Royal Dutch Shell

( RDS-A) were released by rebels on Thursday. Kidnapping and attacks on oil installations have become routine in Nigeria, where rebels are pressuring the government to give them a share of the country's oil revenue. Nigeria is Africa's largest oil supplier and typically produces 2.5 million barrels per day.

Traders are focused on global oil supplies because there is little spare capacity left. Booming demand in India, China and the U.S. have kept inventories tight and forced up prices. While the world consumes around 85 million barrels of crude per day, there is only 2 million barrels of spare capacity, much of it from Saudi Arabia.

The weekly petroleum update from the U.S. Energy Department released on Wednesday gave traders some relief. Gasoline inventories climbed for the sixth week in a row, and crude stockpiles are 4.2% above last year. The markets have been concerned there wouldn't be enough fuel to meet peak demand during the summer when millions of Americans go on road trips.

Heating oil rose 6 cents to close at $2.04 a gallon and gasoline inched up 5 cents to $2.15 a gallon. Natural gas shed 2 cents at $6.17 per million British thermal units.

In trading, shares of oil service and exploration companies were down less than 1% on the Amex Oil Index and the Philadelphia Oil Service Index.

Marathon Oil

(MRO) - Get Report

,

BP

(BP) - Get Report

and

ExxonMobil

(XOM) - Get Report

were leading the declines on the Amex Oil Index, down about 1%.

Tidewater

(TDW) - Get Report

,

Global Santa Fe

(GSF)

and

Schlumberger

(SLB) - Get Report

were posting the largest decline among service companies, down 1%.