Oil Ends Above $72 a Barrel

An inventory report showed falling crude and gasoline stocks.
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Updated from 2:25 p.m. EDT

Oil prices topped $72 Wednesday following unexpectedly large declines in oil and gasoline inventories in the Energy Department's weekly report.

Light, sweet crude for May delivery closed up 82 cents to $72.17 a barrel on Nymex, thanks in part to the expiration of the May contract on Thursday. Oil futures cleared their previous all-time high of $71.35 a barrel on Tuesday, whipped up by concerns that Iranian crude exports will be cut.

The U.S. Energy Department's weekly petroleum survey released this morning showed crude stockpiles dropped by 800,000 barrels to 345.2 million barrels last week. Skyrocketing oil prices come in the face of inventories that are nearly 7% above last year.

"If the markets needed any more reason to be bullish on oil prices, this week's inventories report provides it," said Rakesh Shankar, an energy analyst with Economy.com in West Chester, Pa.

Crude supplies remain high because of a slower-than-expected recovery in refinery operations. Refiners are operating at lower run-rates as they switch over to new fuel requirements and cleaner, summer blends of gasoline. Although refiners increased their run-rates last week, the increase was less than 1% to 86.2%.

Heavy refinery outages have translated into low inventories of refined products, like gasoline and heating oil. Unleaded gasoline supplies plummeted 5.4 million barrels to 202.5 million barrels, a loss that was double what analysts had expected.

Traders are worried inventories, which are about 5% below last year, won't be enough to meet peak demand during the summer driving season. Those fears have helped boost the price of wholesale gasoline 26% since February and pushed up futures in daily trading 2 cents to $2.23 a gallon on Wednesday.

Record crude prices lifted other energy futures on Wednesday, with heating oil adding 1 cent to settle at $2.06 a gallon. Inventories of distillates, which include jet fuel and heating oil, dropped 2.8 million barrels to 114.6 million barrels, double what analysts had predicted. Despite the decline, distillates are nearly 10% above last year.

A warm spell across the southern U.S. and traders covering their short positions boosted natural gas prices by 18 cents to close at $8.19 per million British thermal units.

"A heat wave throughout the southern U.S., Texas and Arizona has demand for spot gas in those regions peaking, and traders temporarily forgetting the storage fundamentals," wrote Scott DeBusschere, director of BMO Nesbitt Burns' Calgary-based commodity derivatives group, in a client note.

The increase comes amid high supplies, which are 33% above last year and 63% above the five-year average. In April, utilities typically boost their stockpiles of natural gas in preparation for the winter heating season. Stockpiles are high because of warm weather and low demand and are expected to climb 50 billion cubic feet to 1.7 trillion cubic feet, according to

Bloomberg

estimates, in the Energy Department's report on Thursday.

The rally in oil prices over the past week has been sparked by Iran's resumption of uranium enrichment after a two-year hiatus, in defiance of Western threats. Iranian President Mahmoud Ahmadinejad has said he intends to expand the country's nuclear development activities to generate more electricity for an expanding population, he says.

President Bush has lashed back with vague comments hinting at potential military strikes. On Tuesday, Bush told reporters at the White House that "all options are on the table" regarding his strategy with Iran. The U.N. Security Council has also given Iran until the end of the month to cease uranium enrichment or face possible economic sanctions.

Energy markets are focusing intently on the nuclear impasse because Iran is the world's fourth-largest crude producer, with daily output around 4 million barrels. Saudi Arabia, typically a swing producer, only has an extra 2 million barrels of crude to offset any supply glitches, not enough to make up for Iranian production. Less crude on the market would likely translate into higher prices.

Rebel attacks on the Nigerian petroleum industry have shaved exports by 26%, or 641,000 barrels a day, and underpinned high oil prices. On Wednesday, militants rejected government offers to build a $1 billion highway and create 20,000 jobs for the oil-rich Niger River Delta, the site of most of the attacks. Rebels have demanded a larger share of the region's oil wealth and vowed to continue their campaign of violence until their demands are met.

Large international oil companies, like

Royal Dutch Shell

(RDS.A)

, have said they won't resume production until the safety of their workers can be guaranteed and a truce is hammered out with the rebels.

In trading, energy shares were generally increasing with oil prices.

Apache

(APA) - Get Report

was one bright spot after the independent oil company reported it was buying all of

BP's

(BP) - Get Report

shallow water fields in the Gulf of Mexico for $1.3 billion in cash and spending about $1 billion to buy back up to 15 million shares. BP and the other oil giants have increasingly left the Gulf of Mexico's continental shelf for deeper waters where the reservoirs are bigger, but the expenses are larger.

The 18 fields Apache is buying have estimated proved reserves of 27 million barrels of liquids and 185 billion cubic feet of natural gas. Daily production is estimated at 8,600 barrels of crude and liquids and 108 million cubic feet of natural gas.

Shares of Apache soared $3.25 to $73.38, while BP increased 53 cents to $75.61.

Valero Energy

(VLO) - Get Report

shares climbed $1.44 to $68.89 after the oil refiner said it was closing a gasoline-producing unit at its Texas City refinery for repairs. Gasoline production is expected to drop by 60,000 barrels per day for about a week until repairs are completed. The Texas City refinery can process up to 245,000 barrels a day.

Shares of

Goodrich Petroleum

(GDP) - Get Report

rose 40 cents to $28.52 after investment bank Raymond James initiated coverage on the independent oil and gas company at outperform.