Oil turns higher as gasoline supplies fall

NEW YORK (CNNMoney.com) -- Oil prices turned higher Wednesday, gaining over $1, after the government said supplies of gasoline and distillates, used to make diesel and heating fuel, showed a surprise decline.

U.S. light crude for August delivery jumped $1.20 to settle at $68.97 barrel on the New York Mercantile Exchange. Oil had traded down 62 cents just prior to the report's release.

Special Reportfull coverage

America's cheapest gas is in this town Summer drivers to get a break on gas Why gas prices are likely to keep climbing You'll pay a little less for gas this summer Expect relief from record February gas prices Why gas prices are rising

Gasoline in-depth Where's the gasoline? Refineries are making money like never before, so why aren't more people getting in on the action? (more) We want it all Consumer Reports survey shows that car buyers aren't ready to sacrifice much for more mileage. (more) 6 ways to cut gas prices From a big fat tax to more efficiency to boosting production, there are ways to do it - but which really stand a chance? (more) Fuel economy wimps Instead of ensuring that we use less gas, politicians and consumers take the easy way out, says Fortune's Alex Taylor. (more)

In its weekly inventory report, the Energy Information Administration said crude stocks rose by 1.6 million barrels last week. Analysts were looking for a gain of 1.2 million barrels, according to Reuters.

But gasoline supplies, running low all year and closely watched during summer driving season, fell by 700,000 barrels.

And distillates slid by 2.3 million barrels. Analysts were looking for a rise of 1.2 million barrels in gasoline stocks and 500,000 barrels in distillates.

Refineries operated at 89.4 percent capacity, a larger-than expected rise, and up from last week's rate of 87.6 percent, which is low for this time of year. A drop in imports was partly to blame for the declining gas and distillate supplies.

"Refinery runs did go up, but they are still well below normal," said Phil Flynn, senior market analyst at Alaron Trading in Chicago. "There's a good chance prices are going to head higher at the pump."

Refinery problems have been a main factor in driving up gasoline prices this year. Gasoline hit an all-time high of $3.227 a gallon back in May, according to AAA. Gas prices have eased a bit since then, but are still close to $3 a gallon.

Crude prices have been the other driving factor behind high gasoline prices.

Crude recently hit a 9-month high on a possible strike in Nigeria, which produces an oil prized for making gasoline and is the world's 8th largest oil exporter.

Prices have backed off a bit since then after the Nigerian strike was averted, and are now about $10 below crude's all-time trading high of $78.40 hit last July.

The Amex oil and gas index, which includes companies such as BP (Charts), Exxon Mobil (Charts, Fortune 500), ConocoPhillips (Charts, Fortune 500), Chevron (Charts, Fortune 500) and Royal Dutch Shell (Charts), is up about 10 percent this year.

In other international news from Reuters, Venezuela confirmed Tuesday that U.S. majors Exxon Mobil and ConocoPhillips would leave giant oil projects after they were nationalized.

U.S. Energy Secretary Sam Bodman said he was worried this could lead to lower U.S. imports from the Latin American country.

OPEC's president Mohammed al-Hamli reiterated the group's view that there is no need to raise production now, saying Tuesday the main factors keeping prices high are geopolitical tensions and U.S. refinery bottlenecks.

In Brazil, oil workers in five states voted Tuesday to strike as part of a five-day national strike threatened to start after July 5.

A strike would disrupt output at state firm Petrobras, which pumps about 1.8 million bpd.

-Reuters contributed to this report