Updated from 11:10 a.m. EST

Gasoline prices forged a new five-month high Wednesday after a government report showed the largest drop in inventories in more than three years.

Unleaded gasoline jumped 7 cents to close at $1.95 a gallon on the Nymex, and pulled up the rest of the energy complex. Light, sweet crude climbed 38 cents to close at a two-month high of $66.45 per barrel.

"The No. 1 reason crude is going up is gasoline stocks," said Mike Reed, vice president of research and analysis at ICAP Energy in Louisville, Ky. "Nigeria is old news and the strike in Norway is old news. What's news is what's going on in the ethanol industry."

In its weekly inventory report, the Energy Department said gasoline stockpiles dropped 5.4 million barrels to 216.2 million barrels last week. Analyst estimates had been for a 1.5 million-barrel drop. Although the decline was the largest since August 2003, inventories remain slightly above last year.

Lower imports and refiners' reluctance to make gasoline with methyl tertiary butyl ether, a gasoline additive linked to water pollution, combined with lower imports sent inventories falling.

Gasoline prices have climbed 20% this month because traders are worried there may not be enough supplies to meet peak demand during the summer driving season. Refiners are phasing out MTBE by May 31 in favor of reformulated gasoline with ethanol.

But ethanol isn't without problems. There may not be enough supplies of the fuel, which is made from sugar or corn, in time for the summer driving season, and transporting ethanol is logistically challenging. Ethanol can't be blended with gasoline at the refinery and then pumped to terminals like gasoline with MTBE; rather, it has to be moved separately by rail or truck and blended at the terminal.

Stockpiles of crude rose 2.1 million barrels last week, above analysts' estimates of a 950,000 barrel-build. Supplies, which now stand at 340.7 million barrels, are at their highest point in seven years.

Crude, which is processed into refined petroleum products like heating oil and gasoline, builds up when refiners are operating at lower rates. Refiners have closed many units to complete seasonal maintenance to produce cleaner, summer blends of gasoline.

Last week, refiners operated at 87% of their capacity, compared to 91% last year. When refiners are processing less crude, supplies of distillates and gasoline can fall. Refinery downtime has an outsized effect on gasoline prices because there have been no new refineries built since the 1970s.

Downtime hit distillate supply levels, too, pushing stockpiles down 2.5 million barrels to 124.2 million barrels. Analysts polled by Bloomberghad expected distillates, which include heating oil, to dip 1.3 million barrels. Still, there is 15% more distillates than a year ago thanks to a warmer-than-usual winter and lower heating demand.

Lower supplies and soaring crude prices translated into higher heating oil prices, which added 2 cents to settle at $1.85 a gallon.

A rash of warm weather and lower heating demand has eaten into natural gas prices. The April contract, which expired at the end of trading today, gained 7 cents to $7.45 per million British thermal units.

This winter, one of the five warmest on record, has boosted natural gas supplies 39% over last year and 67% above the five-year average. Supplies likely will remain bloated until the summer when cooling demand begins. Analysts polled by Bloomberg expect a draw of 86 billion cubic feet from 1.9 trillion cubic feet last week. The figures are due out at 10:30 a.m. EST on Thursday.

Robust inventories kept crude prices trading between $60 and $64 over the past month until Tuesday, when oil rose 3% to close at $66.07 a barrel. A mix of supply disruptions in Nigeria, a nuclear standoff with Iran and a large hedge fund buying futures in afternoon trading boosted prices. The contract last cleared $66 on Feb. 6.

"The move was technical, not fundamental," said Abe Glass, president of Glass Futures Corp. in White Plains, NY.

Now that prices have broken out of that range, prices could gain momentum and hit new highs on continued supply problems abroad.

Supply problems or the specter of them have roiled the energy markets, despite robust domestic inventories, and added a $10 to $15 "risk premium" to crude prices, some analysts said. Without the Iranian nuclear standoff, rebel attacks in Nigeria and Iraq and saber rattling in Venezuela, prices would be lower.

The U.N. Security Council is meeting Wednesday to discuss what can be done to contain Iran's nuclear development ambitions. The U.S., France, Britain, China and Russia were meeting early today to hammer out a statement calling on Iran to suspend its suspect nuclear program.

Unrest in Nigeria has cut that country's oil output by 26% to 1.6 million barrels. Rebels have blown up oil installations and kidnapped oil workers this year in a campaign to destabilize the central government and gain a share of Nigeria's oil wealth.

In Venezuela, the government has raised royalties on crude production, stepped up tax claims against oil companies and shut down their offices in a campaign to renationalize the country's petroleum industry. Venezuela is the world's fifth-largest exporter of crude.

A potential work stoppage in Norway, one of the world's top oil producers, were also keeping traders on edge. Norway's largest private union has threatened to go on strike this Saturday over pension and wages. A strike would affect 38,000 members in the country's shipyards, engineering and manufacturing industries.

In trading Wednesday, shares of the BG Group PLC ( BRG), one of Britain's largest oil and gas producers, skyrocketed $3 to $64 on speculation ExxonMobil ( XOM) may buy the company. The British Independent newspaper reported the speculation in a column today. Shares of Exxon jumped 53 cents to $61.48.

The stocks of refiners climbed on higher gasoline prices and expectations their margins will fatten as they switch over to reformulated gasoline. Shares of Valero Energy ( VLO)increased 73 cents to $60.59; Sunoco ( SUN)jumped $1.74 to $79.84; Tesoro ( TSO) gained $1.10 to $67.92, and Frontier Oil ( FTO)surged $2.83 to $60.96.

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