Updated from 1:24 p.m. EST

Oil prices staged a recovery Thursday, moving above $63 a barrel, as traders reassessed a report on crude inventories and considered supply concerns in Nigeria and Iran.

Light, sweet crude for May delivery rose $2.14 to close at $63.91 a barrel on the Nymex. Oil prices briefly hit $64.

U.S. oil inventories unexpectedly fell by 1.3 million barrels to 338.6 million barrels last week, according to the Energy Department's weekly update on Wednesday. Analysts had expected a 2.4 million-barrel increase for the week ended March 17.

A drop in imports and higher processing rates at refineries helped draw down inventories. Despite the decline -- the first in six weeks -- supplies remain 9% above a year ago.

Crude prices have remained high thanks to a mix of supply problems in Nigeria, where daily output is down 25% because of attacks by militants, and an ongoing standoff with Iran over its nuclear ambitions. On Thursday, Italian oil company ENI said it could not honor its export commitments on its Brass River crude after a pipeline attack last week, Reuters reported. The pipeline carries 75,000 barrels per day.

The U.N. Security Council has been discussing what strategy to take against Tehran, OPEC's second-largest crude producer. Economic sanctions have been floated, but aren't likely since they would trim world crude supplies and drive up prices.

Still, some analysts believe crude prices are in for a correction.

"In the absence of a new supply threat or dangerous geopolitical shift, holders of length will become increasingly nervous and reluctant to hold positions much longer," said John Kilduff, an energy analyst with Fimat USA in New York. "This is the core of our belief in a correction."

Unleaded gasoline picked up 8 cents, or 5%, to finish at $1.81 a gallon, nearly erasing its fall on Wednesday. Traders are trying to figure out if there are enough supplies to accommodate an inevitable drawdown as the deadline for phasing out MTBE, a gasoline additive linked to water pollution, by May 31.

Wednesday's drop in gasoline prices was also tied to a decision by the Federal Energy Regulatory Commission, which regulates the energy industries, on Wednesday. The FERC rejected a recent plan by Colonial Pipeline to restrict shipments of gasoline with MTBE.

"Now the market fears a flood of gas supply may be hitting just in time for April delivery," said Phil Flynn, an energy analyst at Alaron Trading in Chicago.

Prices will probably remain volatile until MTBE is entirely withdrawn from gasoline.

Heating oil added 4 cents, or 2%, to close at $1.78 in a delayed reaction to a drop in supplies on Wednesday. Distillates, which include heating oil and diesel, fell 800,000 barrels to 126.7 million barrels in the Energy Department's weekly supply report on Wednesday. Distillates include diesel and heating oil. An unseasonably warm winter has helped boost supplies 15% above a year ago because companies and consumers are not cranking up their furnaces as often.

Natural gas rose 38 cents, or 5%, to finish at $7.33 per million British thermal units. Prices likely rose due to factories switching over to the fuel from more expensive petroleum products.

A warmer-than-usual winter has boosted natural gas supplies 39% over last year and 67% above the five-year average. Inventories dropped a slight 23 billion cubic feet last week to 1.8 trillion cubic feet, the Energy Department reported in its weekly supply update Thursday. The average decline over the past five years has been 59 billion cubic feet. Natural gas is used for heating and generating electricity.

Supplies will likely remain bloated until the summer and increased cooling demand begins. If the summer is very hot or there is an active hurricane season, brimming inventories could quickly be drawn down. A little over 14% of the Gulf of Mexico's natural gas production has not recovered since a pair of hurricanes shut down much of the region's oil and gas output.

Despite a recent cold snap, this winter has been one of the five warmest on record, the National Weather Service said. The agency's six-to-10-day outlook predicts that temperatures will fall below average in much of the eastern U.S. through next week. Natural gas is used to generate electricity and heat.

Energy stocks generally rose in tandem with crude prices Thursday. Shares of Chevron ( CVX) increased 9 cents, or 0.2%, to $56.58 after the oil giant raised its outlook for oil and gas production in the Gulf of Mexico by 25% during the first quarter.

Output should climb to 200,000 barrels a day in the three months ended March 31 from 160,000 barrels in the fourth quarter, Chevron said.

The increase, though, came as production abroad is down 4% thus far in 2006 vs. its daily average in the fourth quarter. From January to February, output hit 1.89 million barrels a day, compared with 1.97 million barrels a day last quarter, a decline attributable to weather problems and higher costs in Indonesia.

ConocoPhillips ( COP) added $1.03, or 1.7%, to $61.51, and Marathon Oil ( MRO) climbed $1.07, or 1.4%, to $77.31.

Prudential Equity Group upgraded each of the company's ratings. Conoco was upgraded to overweight from neutral, and Marathon went to neutral from underweight.

Independent refiners, like Occidental Petroleum ( OXY) and Valero Energy ( VLO) were soaring on lower gasoline supplies before the peak summer driving season. The markets have become very sensitive to any inventory interruptions.

Shares of Occidental jumped $1.85, or 2%, to $94.34, and Valero gained $1.41, or 2.5%, to $58.87.

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