Updated from 10:55 a.m. EDT

Gasoline prices hit new six-month highs Wednesday after a government report showed another steep decline in inventories last week.

Wholesale gasoline surged 4 cents to close at $2.09 a gallon on the Nymex. The contract was buoyed by concerns there won't be enough reformulated gasoline to meet peak demand during the summer driving season. Heavy refinery maintenance cut gasoline inventories, which are 2% below last year, by 3.9 million barrels.

May crude retreated to $68.62 a barrel, down 52 cents, after hitting fresh seven-month highs of $69.55 earlier in the session. The contract closed at $68.98 on Tuesday, its highest price since Hurricane Katrina shut down much of the Gulf Coast's oil industry.

Oil prices have been testing new highs on concerns the U.S. is considering attacks against Iranian nuclear facilities. Iran said Tuesday that it successfully enriched uranium on a small scale with 164 centrifuges.

Iranian President Mahmoud Ahmadinejad said on Tuesday that Iran had "joined the club of nuclear countries," and would pursue large-scale uranium enrichment using 54,000 centrifuges.

In February, Iran restarted small-scale uranium enrichment in defiance of Western threats to impose economic sanctions against the country. The U.N. Security Council gave Iran until the end of this month to show that its nuclear development activities are designed to generate electricity, and not, as the West suspects, to build atomic weapons.

On Wednesday, Mohamed Elbaradei, the head of the U.N.'s nuclear watchdog agency, is expected to arrive in Tehran for talks to resolve the impasse.

Iran's move has kept traders on edge because the country is the world's fourth-largest crude producer, with a total daily output of around 4 million barrels. In the event of a trade embargo, oil prices would skyrocket and inventories would be cut. Saudi Arabia, which has the highest oil production in the world, would not be able to make up the difference, because it only has 2 million barrels of excess capacity.

Despite sky-high crude prices, world consumption of crude is expected to rise 1.8% this year to an average of 85.1 million barrels a day, the International Energy Agency said in its monthly report. The estimate remains the same as last month.

The spike in crude prices comes despite record inventories. In the U.S., supplies surged 3.2 million barrels to 346 million barrels of oil, the highest level since May 1998. Crude in storage is nearly 8% above a year ago, the Energy Department said in its weekly report.

Crude has been building up at refiners, which have been shuttered for maintenance and to comply with new fuel requirements. Refiners operated at 85.6% of capacity, compared with 85.9% a week earlier. Refiners have not been coming online quickly because they're racing to phase out methyl tertiary butyl ether, an additive linked to water pollution, in favor of ethanol by May. Crude is refined into products such as gasoline and heating oil.

Refinery outages, which has run from January to May this year, has cut gasoline inventories by 7% over the past month. Stockpiles declined to 207.9 million barrels, the Energy Department said, exceeding analyst estimates for a 2-million-barrel drop.

Supplies of distillates, which include heating oil, fell by 4.2 million barrels to 117.4 million barrels. In a

Bloomberg

survey, analysts had expected a 1.5-million-barrel drawdown. The decline isn't nearly as significant, because the amount of distillates in storage is 12% higher now than last year, thanks to mild winter temperatures and lower heating demand.

The drawdown boosted heating oil prices by 2 cents to settle at $1.97 a gallon.

Warm weather, high supplies and low demand have dampened prices of heating fuels. There is 36% more natural gas in storage than last year, and inventories probably will rise by 24 billion cubic feet from 1.7 trillion cubic feet in the Energy Department's supply update due out at 10:30 a.m. Thursday.

Natural gas closed down 10 cents at $6.81 per million British thermal units in expectation of a boost in supplies. Hedge funds are gambling natural gas prices will fall even further, and increased their short positions, or bets that prices will fall, by 13% for the week ended April 4. Shorts outnumbered longs by 28,604 contracts, according to the Commodity Futures Trading Commission, which regulates the futures and options markets.

Shares of refiners climbed Wednesday amid a slower-than-expected recovering in operations.

Frontier Oil

(FTO)

shares rose 38 cents to $56.04 even though the stock was hit with a second downgrade in the past two days. Bank of America cut its rating on the stock from neutral to sell, and on Tuesday, Credit Suisse lowered its estimate from neutral to underperform.

Sunoco

(SUN) - Get Report

added $2.32 to $80.93;

Holly

(HOC)

gained 77 cents to $80.07;

Valero

(VLO) - Get Report

jumped $1.15 to $63.30.

Chevron

(CVX) - Get Report

bought a 5% stake Reliance Petroleum, an Indian refiner, for $300 million. Reliance plans to build a refinery that can process 580,000 barrels of crude per day next to a 650,000-barrel refinery in Jamnagar, India. The addition would make the site the world's largest refining complex.

Chevron shares were down 78 cents at $58.68.