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Oil Settles Below $70 After Hitting $70.52 On Supply Concerns

Oil futures spiked above $70 a barrel on Thursday for the first time since Sept. 1 on a government report that showed gasoline inventories dropped unexpectedly as the summer driving season neared its peak.

Retail gasoline prices, meanwhile, broke a monthlong decline and held steady overnight at a national average price of $2.975 a gallon, according to AAA and the Oil Price Information Service. Gas prices had been falling steadily since their May 24 peak of $3.227 a gallon.

Analysts warned that pump prices could start rising again if there's an imbalance between demand and supply.

"Gasoline demand stays strong," said Paul Horsnell, an analyst at Barclays Capital. "While it is still early in the driving season, June demand has now moved close to the all-time record for any month."

After rising as high as $70.52 and trading above $70 for several hours, light, sweet crude for August delivery closed the day's trading up 60 cents at $69.57 a barrel on the New York Mercantile Exchange. The front month contract last settled above $70 on Aug. 31, 2006.

Gasoline futures for July rose 1.21 cents to settle at $2.2667 a gallon on the Nymex. Brent crude for August delivery fell a cent to settle at $70.52 a barrel on the ICE Futures exchange in London.

In other Nymex trading, July heating oil futures slipped 0.63 cent to settle at $2.0183 a gallon, while natural gas prices for August delivery plummeted 42.8 cents to settle at $6.655 per 1,000 cubic feet. A government report on Thursday showed natural gas inventories rose by 99 billion cubic feet last week, more than analysts expected.

Analysts said oil prices pulled back late in the session as traders locked in profits after prices penetrated the psychologically important $70 level, considered by traders to be a technical barrier.

"I think this might be just some selling off after breaking through this technical support," said Jason Schenker, an economist at Wachovia Corp.

In its weekly inventory report on Wednesday, the U.S. Energy Department's Energy Information Administration said gasoline inventories dropped 700,000 barrels in the week ended June 22. Analysts polled by Dow Jones Newswires had expected a 1.1 million barrel gain.

"The market is reacting to the surprising result," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

The EIA report also showed that crude oil supplies rose 1.6 million barrels to 350.9 million barrels last week, above the average estimate of a 1 million barrel increase. Refinery utilization rebounded 1.8 percentage points to 89.4 percent, higher than estimates of a gain of 0.8 percentage points.

The weekly petroleum supply snapshot has been watched closely during a spring and early summer during which an unusually high number of refinery outages have led to high gasoline futures prices and record prices at the pump.

While an increase in oil inventories would seem to be a development that would send oil prices down, analysts have long said that oil prices follow gasoline futures. Oil trades higher in sympathy anytime something happens that affects gas supplies, analysts say.

Crude inventories are at nine-year highs, but that oil is going to be in demand by refineries looking to turn it into gasoline and heating oil, said Addison Armstrong, an analyst at TFS Energy in Stamford, Conn.

"Even though we've got a lot of crude, we're going to need it," Armstrong said.

Antoine Halff, head of energy research at Fimat USA LLC, says Nymex crude is trying to catch up to the price of Brent crude. Domestic crude historically has traded at a premium to Brent, but prices reversed as crude stocks built up at the Nymex delivery point of Cushing, Okla.

"You had a glut of (West Texas crude), which depressed the price," Halff said.

Now, those Cushing stocks are falling as domestic refineries come back online, supporting crude prices, Halff said.

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