Oil sets new closing record

NEW YORK (CNNMoney.com) -- Oil prices set a new closing high Wednesday, surpassing $78 a barrel as ramped up refining activity fuels demand for crude.

U.S. light crude for September delivery rose $1.38 to settle at $78.21 a barrel on the New York Mercantile Exchange (NYMEX). The previous record settlement price was $77.03, hit last July following Israel's invasion of Lebanon and fears the conflict could spread to the broader Middle East.

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Tuesday's closing price is also very close to oil's all-time trading high of $78.40, also set last July. Markets pay more attention to the trading price than they do closing prices, and crude continued to flirt with setting a new all-time trading record in electronic trade after the closing bell.

This time it's supply and demand fueling the run-up instead of war.

On Tuesday traders priced in another government report, due Wednesday, that's expected to show a drop in crude stocks and a rise in gasoline.

Crude supplies are expected to fall 700,000 barrels, while gasoline supplies are expected to gain by 500,000 barrels and distillates increase by 1.4 million barrels, according to a Reuters poll.

Refineries are expected to increase production by 0.5 percentage points.

While crude supplies are still at high levels in the United States, one trader said it's the fact that crude stocks are declining at all, combined with rapid demand growth worldwide, that's pushing prices to new records.

"This is a worldwide tight market," Ray Carbone, a broker and trader at Paramount Options, said from the floor of the NYMEX. "The demand has shown no signs of letting up."

Another analyst said the real test now is whether crude can break $78.40, and stay above that number for several days.

If yes, "then I think we are going to $95," said Peter Beutel, an oil analyst at Cameron Hanover. But if not, he said this could the high point for crude, at least in the short term.

Crude prices lagged through out the spring and early summer, as one refinery outage after another sapped demand and caused crude supplies to swell.

But now refineries have finally begun to produce at normal capacity. The upside for motorists is gasoline supplies have risen, and retail gas prices are down about 11 percent since May.

But crude prices have soared nearly 25 percent over the last two months as stockpiles around the country have dwindled for six weeks straight.

The unraveling of a peace deal in Nigeria, a major OPEC exporter of high-quality crude, has also contributed to oil's runup, as has projections for less global supply but higher global demand in the years ahead.