Crude Falls for Third Day

Updated from 10:51 a.m. EDT

Oil prices fell for a third straight session Wednesday after the Energy Department reported an unexpected increase in gasoline inventories and speculation grew that the conflict between Lebanon and Israel would not widen.

Light, sweet crude for August delivery tumbled 88 cents to close at $72.66 a barrel on Nymex. Prices have plummeted 6% since hitting a record high of $77.03 last Friday. Federal Reserve Chairman Ben Bernanke's testimony before Congress this morning also helped drive down oil prices, suggesting that high energy prices have slowed economic growth.

Oil prices have been drooping all week after the U.S. called for a cease-fire in the Israel-Hezbollah conflict, sparking hopes it would soon end. The energy markets have been worried that Iran, which supplies the militant group Hezbollah with weapons and money, would get dragged into the conflict. Iran is also the world's fourth-largest crude producer.

On Wednesday, Israeli forces crossed into Lebanon and fought with Hezbollah, while air strikes continued in both Lebanon and Israel. Wire-service accounts varied, but reports put the number of civilians killed today at anywhere from 19 to 50 people.

U.S. Secretary of State Condoleezza Rice, who called for a cease-fire when conditions are right, is scheduled to meet with U.N. Secretary General Kofi Annan on Thursday about the conflict and then fly to the Middle East on Friday.

More than 200 people have been killed in the conflict, which was sparked by Hezbollah's kidnapping of two Israeli soldiers last week. The fighting is the most intense since Israel invaded Lebanon in 1982.

According to the Energy Department, oil inventories climbed by 200,000 barrels, blindsiding analysts, who had called for a drop of 650,000 barrels. The boost in supplies came as imports surged to 10.7 million barrels per day, up 1.1 million barrels. Oil tanker deliveries were not counted the previous week because of the July Fourth holiday.

Refining capacity soared to a greater-than-expected 92.9% last week, up from 90.5% the previous week. The boost in run rates was chalked up to the resumption in production of a key refining hub in Louisiana. An oil spill had shut down tanker traffic and cut output at one of the country's largest refiners.

Increased production and imports boosted gasoline inventories by 1.5 million barrels last week, confounding analysts who had predicted a slump of 725,000 barrels. There is now almost 1% more gasoline in storage than a year ago, a good sign because the summer is the peak season for gasoline use as millions of Americans take to the roads on vacation. Over the past four weeks, demand was up 1.9% compared with the year-ago period.

Wholesale gasoline shed 4 cents to $2.22 a gallon.

Stockpiles of distillates rose by 1.2 million barrels, slightly lower than the 1.7-million-barrel rise analysts in a Bloomberg poll had expected. Lower production was behind the smaller-than-expected increase. Heating oil lost 2 cents to $1.96 a gallon.

The U.S. Energy Department's weekly petroleum update was released at 10:30 a.m. EDT.

Hotter-than-average temperatures across much of the country pushed up the prices of natural gas by 30 cents to $5.86 per million British thermal units. Some utilities use natural gas to generate electricity.

Despite the downturn in crude prices, stocks rallied Wednesday after Bernanke said inflation should slow in the next few quarters. Traders took his comments as a sign the Federal Reserve may be close to ending its interest rate hikes.

Shares of energy companies soared 1% to 2% on the Amex Oil and Natural Gas Indices and the Philadelphia Oil Service Index Wednesday. Among oil drillers, Repsol ( REP), Total ( TOT) and Hess ( HES) were reporting the largest increases, up 2% to 3%.

Oil service companies Noble ( NE), National Oilwell Varco ( NOV) and Nabors Industries ( NBR) jumped the most on the index, up 3% to 4%.

Natural gas companies Southwestern Energy ( SWN), Questar ( STR) and Noble Energy ( NBL) led the Amex Natural Gas Index by 1%.

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