Oil prices retreat after nearing $77 a barrel

Updated: 1:46 p.m. ET Sept. 6, 2007

NEW YORK - Most energy futures fell Thursday after the government reported an unexpectedly large decline in oil inventories and an equally surprising jump in refinery activity.

Prices retreated from earlier gains that followed unsettling news from abroad. Syrian armed forces said they opened fire on Israel fighters that allegedly violated Syrian airspace, and the U.S. embassy in Nigeria warned that American and other Western interests in the country are at risk of a terrorist attack.

In its weekly inventory report, the Energy Department’s Energy Information Administration said crude oil inventories fell by 3.9 million barrels in the week ended Aug. 31., more than tripling analysts’ average prediction for a 1.1 million barrel decline. Gasoline inventories fell by 1.5 million barrels, slightly more than the 1.1 million barrel decline analysts surveyed by Dow Jones Newswires had expected.

Refinery utilization, on the other hand, jumped by 1.8 percentage points to 92.1 percent of capacity, much more than the 0.2 percentage point increase analysts had expected.

“Nobody was looking for that,” said Addison Armstrong, an analyst at TFS Energy Futures LLC in Stamford, Conn.

Some traders read the increase in refinery utilization as a sign gasoline supplies may grow in the weeks to come.

“There might be a surge in refinery activity prior to the maintenance season,” said Antoine Halff, head of energy research at Fimat USA LLC.

Light, sweet crude for October delivery fell 20 cents to $75.53 a barrel on the New York Mercantile Exchange after rising above $77 earlier. October gasoline futures fell by 4.2 cents to $1.9545 a gallon, reversing an early gain of more than 3 cents.

Heating oil futures added 0.87 cents to $2.1086 a gallon, while natural gas futures fell 14 cents to $5.665 per 1,000 cubic feet. A separate government report Thursday morning said natural gas inventories rose by 36 billion cubic feet last week. That’s less than analysts had expected, but keeps inventories at record levels.

In London, October Brent crude lost 44 cents to $73.90 a barrel on the ICE Futures exchange.

The EIA report also showed that distillates, which include heating oil and diesel fuel, grew by 2.3 million barrels, much larger than the expected 100,000 barrel gain.

Gasoline imports rose by 321,000 barrels a day last week, on average, to 1.3 million barrels per day, while imports of crude oil rose by 415,000 barrels per day, on average, to 10.2 million barrels per day.

Gasoline demand has averaged 9.6 million barrels per day over the last four weeks, up 0.5 percent from the same period last year.

Some analysts read the EIA report bullishly. Gasoline supplies are at their lowest level since Hurricane Katrina, noted Tim Evans, an analyst at Citigroup Inc.

“This is still a rock-bottom gasoline inventory number,” Evans said. Supplies will remain tight despite the fact that demand for gasoline ebbs in the fall, Evans added.

Indeed, prices at the pump continue to rise although peak summer driving season has ended. The national average price of a gallon of gas rose 1.5 cents overnight to $2.807, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, peaked at $3.227 a gallon in late May.

Earlier Thursday, energy futures jumped on the reports that Syrian defense forces had fired on Israeli aircraft, Armstrong said.

“That is what really kicked the whole thing off,” Armstrong said. “That is not good for the prospect of lower oil prices.”

Oil traders worry that any conflict in the Middle East will escalate, drawing the U.S. in and disrupting oil supplies.

Prices were also supported earlier by the Nigerian terror warning. In an e-mail statement to U.S. citizens in Nigeria, the U.S. embassy said, “potential targets include official and commercial installations in Abuja and Lagos.” The embassy did not elaborate.

Nigeria is a key supplier of crude oil, and worries about supply disruptions there often send oil futures higher.

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