Oil Ends Lower on Zarqawi Death

But July crude inches back above $70 a barrel.
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Updated from 12:58 p.m. EDT

Oil prices fell Thursday after al-Qaeda leader Abu Musab al-Zarqawi was killed in an air raid in Iraq, raising hopes insurgent attacks on the country's oil industry would diminish.

Light, sweet crude for July delivery lost 47 cents to close at $70.35 a barrel. During trading, the contract sank below $70 for the first time in two weeks. Oil prices have lost more than $2 since Tuesday when Iranian officials praised an incentives proposal designed to end their nuclear program.

Al-Zarqawi died Wednesday evening in an in a U.S. air strike north of Baghdad. American officials, who had placed a $25 million bounty on his head, considered his capture or death instrumental in reducing the country's violence.

Insurgent attacks on Iraq's pipelines and refineries over the past three years have driven down crude production by 22% to 1.9 million barrels per day. Insurgents routinely attack pipelines and refineries in Iraq and then sell oil and petroleum products on the black market.

The news came amid progress in U.S. efforts to convince Iran to scale back its nuclear program and a day after the Energy Department reported another rise in U.S. fuel inventories. Iran's top nuclear negotiator said the proposal had "positive steps" and suggested another round of talks to hammer out the details.

The decline in crude prices sent heating oil and gasoline prices each down 1 cent, to $1.98 a gallon and $2.10 a gallon, respectively.

Energy shares slipped on lower crude prices and worries high energy costs were dampening the economy, but floated higher after the White House increased its forecast for economic growth later this afternoon. Gross domestic product is expected to grow by 3.6%, up from a previous estimate of 3.4%.

Earlier this week,

Federal Reserve

Chairman Ben Bernanke sounded a strong alarm about inflation, giving rise to speculation the bank will raise interest rates at its meeting later this month. This week alone, the Amex Oil Index is down 6% and the Philadelphia Oil Services Index has swooned 8.7%.

Still, oil prices remain higher by 16% this year, rising on every twist and turn of the standoff with Iran, which has refused to stop enriching uranium despite Western threats of economic sanctions and military strikes. Rebel attacks in Iraq, and downed production in Nigeria and the Gulf of Mexico have also underpinned prices.

Nigerian rebels have launched a campaign of violence this year against the country's oil industry to pressure the government into giving them a share of the country's oil revenues. Production there is down about a quarter since January at 2.2 million barrels per day. Still, prices were given some relief on Thursday when Nigerian rebels said they would release five South Korean oil workers they abducted yesterday.

The credit ratings agency Fitch said in a report Thursday that violence in Nigeria will make it difficult for large international oil companies such as

Exxon Mobil

(HES) - Get Report

and

Royal Dutch Shell

(RDS-A)

to meet their medium-range output goals and to replace reserves quickly. Other companies that have large operations in Nigeria include

Total

(TOT) - Get Report

,

Chevron

(CVX) - Get Report

, and

Eni

(E) - Get Report

.

Oil prices are high because booming demand from Asian and U.S. economies have tightened global supplies. The world consumes around 85 million barrels of crude per day, and with only 2 million barrels of spare capacity, there's not enough to cover demand spikes.

Every week, traders comb the U.S. government's petroleum report for insights into the country's energy stockpiles and consumption. Gasoline in particular has been of importance as refiners grapple with a new ethanol requirement and produce summer blends of gasoline.

On Wednesday, the U.S. Energy Department reported that gasoline inventories rose for a sixth straight week, climbing by 1 million barrels to 210.3 million barrels. The increase helps reduce traders' worries of a shortage during the peak summer driving season.

Despite higher prices at the pump, Americans used more gasoline over the past four weeks, with demand rising 0.7%. Traders have been divided whether high prices would force consumers to cut back on their gasoline purchases. Regular gasoline prices averaged $2.89 a gallon last week, the Energy Department said.

Wednesday's Energy Department report showed that distillate inventories picked up 1.8 million barrels thanks to higher production and imports. Crude stockpiles climbed by 1.1 million barrels and are now 4.2% above last year.

In the Energy Department's weekly natural gas report released Thursday, stockpiles rose 77 billion cubic feet to 2.3 trillion cubic feet last week. In a

Bloomberg

poll of analysts, estimates had called for an increase of 84 billion cubic feet.

Supplies are up 24% over last year and 41% over the five-year average thanks to mild winter and summer temperatures and low demand for heating and cooling.

Natural gas prices added 21 cents to $6.19 per million British thermal units.

In trading Thursday, stocks of natural gas and oil service and exploration companies were mixed.

Hess

(HES) - Get Report

,

BP

(BP) - Get Report

and

Total

(TOT) - Get Report

were leading the declines on the Amex Oil Index, down 2%.

On the Philadelphia Oil Service Index, which was up less than 1%,

Noble

(NE) - Get Report

,

Cameron International

(CAM)

and

BJ Services

(BJS)

were gaining 2%.

Southwestern Energy

(SWN) - Get Report

,

Noble Energy

(NBL) - Get Report

,

EOG Resources

(EOG) - Get Report

and

Williams Companies

(WMB) - Get Report

were posting the largest declines on the Amex Natural Gas Index, down 2% to 3%.