Updated from 12:28 p.m. EDTCrude prices set fresh seven-month highs Thursday as worries over Iran's nuclear ambitions and new rules governing gasoline additives outweighed robust supplies. Light, sweet crude for May delivery rose 70 cents to settle at $69.32 a barrel on the Nymex. Crude prices were last this high immediately after Hurricane Katrina pummeled the Gulf Coast and shut down much of the region's petroleum industry. Surging oil prices were boosted in part by short-covering ahead of a three-day weekend. Traders often want to close out positions so they don't leave themselves open to drastic price changes when heading out for a break. The Nymex is closed Friday in observance of Good Friday. The run-up in crude prices comes even though supplies are their highest since May 1998. Last week, domestic oil supplies zoomed up 3.2 million barrels to 346 million barrels, according to U.S. Energy Department figures. Crude in storage is nearly 8% above a year ago, more than enough to cover any temporary supply problems. Still, the Nymex often doesn't operate logically, because traders are operating out of fear of real or perceived supply hiccups. This week, crude prices have stayed above $68 on concerns the U.S. is planning military attacks on Iran over its nuclear ambitions. Tehran has upped the ante with its announcement Tuesday that it had successfully enriched uranium using 164 centrifuges for the first time. The Iranian president, Mahmoud Ahmadinejad, vowed to expand uranium enrichment using up to 54,000 centrifuges. On Thursday, Ahmadinejad said Iran wouldn't back down despite Western threats of economic sanctions and the possibility of military attacks. The head of the U.N.'s nuclear watchdog agency, Mohamed Elbaradei, arrived in Tehran Wednesday to hammer out a diplomatic solution to the impasse, and China is sending an envoy to discuss the dispute. Iran kick-started nuclear development after a two-year hiatus to produce more electricity for its growing population. The West contends, though, that Iran intends to build atomic weapons. As the world's fourth-largest oil producer, Iran can cut crude exports and immediately drive up prices and shave international supplies. There are not enough oil supplies to make up for any shortfall from Iran, which pumps around 4 million barrels per day. Production losses in Nigeria, where separatists have kidnapped oil field workers and blown up pipelines and platforms in a bid to gain a share of the country's oil wealth, have also roiled the energy markets. Output is down 26% from 2.5 million barrels per day, and likely will not come back online soon. Royal Dutch Shell ( RDS-A)has borne the brunt of the production losses, with 455,000 barrels down since the attacks stared in February. Last week, the oil giant said it would restart an offshore field that pumps 115,000 barrels per day, but as of Wednesday it had not yet assessed the field, a necessary step to resuming production, Reuters reported. Wholesale unleaded gasoline closed up 2 cents to a new six-month high of $2.10 a gallon. Gasoline prices have soared since Wednesday when the U.S. Energy Department said inventories dropped 3.9 million barrels last week, double analysts' expectations. Traders are worried there won't be enough reformulated gasoline to meet peak demand during the summer driving season. Refinery outages have also shaved inventories, which now stand 2% below last year. Maintenance has lasted longer than usual this year as refineries scramble to meet new fuel requirements and switch over to producing summer blended gasoline. By May, refiners must phase out methyl tertiary butyl ether, an additive linked to water pollution, for ethanol. Gasoline prices are expected to remain high, even after the change. The U.S. Energy Department estimates retail gasoline will average $2.62 a gallon nationwide, up 25 cents from last year. "With the impending transition from MTBE to ethanol as an oxygenate for gasoline, prices are likely to remain high until the market is convinced of the refining system's ability to go from unfinished blendstocks to finished gasoline," wrote Mark Flannery, an energy analyst at Credit Suisse in New York, in a research report. Skyrocketing gasoline and oil prices pulled up heating fuel prices despite record-high inventories and mild weather. Heating oil added 1 cent to finish trading at $1.98 a gallon, while natural gas rebounded 33 cents to close at $7.14 per million British thermal units. In the Energy Department's weekly supply report, natural gas in storage rose 19 billion cubic feet to 1.7 trillion cubic feet, below analysts' projections of a 24 billion cubic feet increase. Inventories 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. Although utilities have been withdrawing natural gas until last week, stockpiles are high because of warm weather and low demand. "Few now care about surprises in this release, seeing as how total inventories are over 65% above average," said Rakesh Shankar, an energy analyst at Economy.com in West Chester, Pa. "The sole remaining price pressures are now the uptick in oil prices, which will place some upward pressure on gas prices as well." Natural gas prices will probably creep back up with the onset of the hurricane season June 1. Nearly 14% of the Gulf Coast's gas production remains offline and more could be shut down if the gulf has another active hurricane season. Meanwhile, in trading Thursday, shares of Tesoro ( TSO) plunged 87 cents to $71.56 after the refiner said first-quarter earnings would fall below analysts' estimates because of losses on hedge positions. The refiner projects earnings of 60 cents per share, compared to analysts' expectations of 74 cents a share. Refining stocks rebounded and followed gasoline prices higher, with Sunoco ( SUN - Get Report) adding 18 cents to $81.13, Valero ( VLO - Get Report) gaining 49 cents to $64.27, and Marathon ( MRO)increasing 18 cents to $79.46. Stone Energy ( SGY)was climbing 36 cents to $44.02 after investment firm Raymond James initiated coverage of the independent oil and gas producer at market perform.
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