Oil nears new record

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NEW YORK (CNNMoney.com) -- Oil prices rose Thursday, putting crude within striking distance of its all-time high, after the assassination of former Pakistan Prime Minister Benazir Bhutto and a larger-than-expected decline in U.S. crude inventories.

U.S. crude for February delivery rose 65 cents to settle at $96.62 a barrel, after being up to $96.37 just before the inventory report.

Bhutto, who had a controversial past in Pakistan and returned in October to again seek the prime minister's seat, was killed, along with at least 22 others, in a suicide attack following a political rally Thursday.

Although nuclear-armed Pakistan has little oil, traders fear any instability could spread to neighboring states. Pakistan borders Iran, the world's fourth-largest exporter of crude, and also lies near the oil-rich Central Asian states.

One analyst said the situation in Pakistan is bound to get worse before it gets better.

"The rioting is just beginning, and there's talk of retaliatory terrorist attacks," said John Kilduff, an energy analyst at MF Global in New York.

Oil prices were also supported by a U.S. government report Thursday showing a drop in domestic supplies of crude oil and heating fuel.

In its weekly inventory report, delayed by a day due to the Christmas holiday, the Energy Information Administration said crude stocks fell by 3.3 million barrels last week. Analysts were looking for a drop of 1.3 million barrels, according to a Dow Jones poll.

Distillates, used to make heating oil and diesel fuel, fell by 2.8 million barrels while gasoline supplies increased by 700,000 barrels. Analysts were looking for an 800,000-barrel decline in distillate supplies and a 1.4 million barrel increase in gasoline stockpiles.

Traders blamed fog in the Houston area for the decline in supplies, as oil tankers were unable to unload their cargo.

It's the sixth-straight week that domestic crude stocks have fallen, and supplies of crude, distillates and gasoline are all in the lower half of the average range for this time of year, EIA said.

But that may not be surprising, as refiners generally try to deplete stocks in December because they must pay taxes on any inventory held at the year's end.

Refiners ran at 88.1 percent capacity, EIA said, slightly below analysts' estimates.

Oil prices jumped nearly $2 Wednesday on renewed Turkish attacks on Kurdish separatists in northern Iraq, although traders noted the thin trading volume during the holiday week was probably exaggerating the price swings.

Nonetheless, the runup puts oil within striking distance of its all-time nominal high of $99.29 a barrel set last month.

Adjusted for inflation, oil is at or near the prices of the early 1980s. At that time, following the Iranian revolution and the outbreak of the Iran-Iraq war, oil traded in the high $30-a-barrel range, the equivalent of between $92 and around $102 a barrel in current prices, depending on the contract cited and the inflation calculation used.

Crude prices have jumped more than 60 percent this year, and surged nearly five-fold since 2002.

Analysts say strong demand and limited supply is the main reason. Strained supplies also exaggerate the effects of geopolitical events, and the price runup has attracted lots of speculative investment, further pushing up prices. A weak dollar is also partly to blame, as oil is priced in dollars worldwide.