Slimming Supplies Push Gasoline Prices Higher

Gasoline futures rose Wednesday after the United States reported a large drop in gasoline inventories, adding to supply worries that have already been heightened by political turmoil in Nigeria and Iran, two of the world's biggest oil producers.

According to a weekly report from the U.S. Department of Energy, gasoline inventories dropped 3.9 million barrels in the week ending April 7 to 207.9 million barrels — down nearly 2 percent from year-ago levels.

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Meanwhile, U.S. gasoline demand is higher, the report said, averaging 9.1 million barrels a day over the past four weeks, or 1.2 percent above a year ago.

Gasoline prices rose nearly 2 cents to $2.0725 a gallon in morning trading on the New York Mercantile Exchange, while heating oil futures rose more than a cent to $1.9720 a gallon.

Light, sweet crude for May delivery slipped 8 cents to $68.90 a barrel, after rising in earlier trading as high as $69.60 — a record for 2006.

May Brent crude futures gained on London's ICE exchange. The contract, which was to expire at the close of London's trading day Wednesday, rose 37 cents to $69.74 a barrel.

According to the Energy Department's report, U.S. crude stocks rose 3.2 million barrels to 346 million barrels, and distillate inventories, which include diesel and heating oil, dropped 4.6 million barrels to 117.4 million barrels. They remain more than 12 percent above year-ago levels.

Refining operation slipped to 85.6 percent in the last week, and that is primarily causing the glut in crude stocks and the decreases in refined products, said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

"We're losing more on the distillate and gasoline side than we're gaining in crude. It doesn't do a lot of good to have a rise in crude if the refineries can't run it," Flynn said.

As the summer driving season approaches, not only are refineries still recovering from the hurricanes that struck the Gulf coast last year — and drove crude futures to their all-time trading high of $70.85 a barrel — but they are also struggling with the prospect of tight ethanol supplies. Ethanol is increasingly being blended with gasoline as refiners phase out their use of additive MTBE, a groundwater contaminate.

Consumers have already been feeling the crunch — on Wednesday, the average U.S. retail price for a gallon of gasoline was $2.695 a gallon, according to AAA's daily fuel gauge report, nearly 43 cents higher than a year ago.

Energy futures have been testing record levels in recent days — a development that the International Energy Agency said appeared to be crimping demand.

In its monthly oil market report Wednesday, the energy watchdog trimmed its world oil demand growth this year to 1.47 million barrels a day, while noting that total demand would likely climb to 85.1 million barrels a day. Still, "the negative effects of high oil prices are visible in most areas," the report said.

Jitters stemming from Iran's nuclear standoff and violence in Nigeria were expected to keep supporting energy prices.

On Tuesday, Iran's president declared the country had successfully enriched uranium for the first time. The U.N. Security Council, concerned about Iran's possible intention to develop nuclear weapons, has demanded that it suspend its uranium enrichment program.

"The Iranian situation has been receiving a fair bit of airplay recently, and it's not one that will go away quickly," said Mark Pervan, commodities analyst at Daiwa Securities in Melbourne.

Militant violence in Nigeria has resulted in more than half a million barrels per day of lost production.

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