Oil prices retreat after rising to new record on drop in crude inventories

NEW YORK — Oil prices retreated after jumping to a new record Wednesday on the government's report of a steep drop in crude inventories and surge in refinery activity.

Crude prices initially rose after the Energy Department's Energy Information Administration reported that oil inventories fell by 6.5 million barrels last week, far more than expected. But gas futures fell on word that refiners ramped up their operations much quicker than expected. As the slide in gas futures prices accelerated, oil prices had little choice but to follow, said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

"The refineries have finally gotten their act together," Flynn said. "They're back to normal, almost."

As the industry rebounds from a spring and early summer in which refiners experienced an unusual number of outages, it is drawing down crude inventories that had hit 9-year highs. Some investors see that draw as a sign crude inventories are tightening.

"That's going to keep the (crude) market underpinned for now," Flynn said.

But traders also remember last summer, when oil prices plummeted by almost $20 in a little over a month after hitting record highs.

"Oil does have a tendency to peak in late summer," Flynn said. "Seasonally-speaking, this bull market's on borrowed time."

Light, sweet crude for September delivery fell $1.30 to $76.91 a barrel on the New York Mercantile Exchange after rising as high as $78.77 earlier. That surpasses the previous intraday record of $78.40, set in July 2006.

On the other side of the petroleum supply chain, refineries are producing more gasoline. That news sent September gasoline futures down 7.97 cents to $2.0262 a gallon on the Nymex.

Retail prices typically lag the futures market, and prices at the pump fell by 0.9 cent overnight to a national average of $2.867 a gallon, according to AAA and the Oil Price Information Service. Gas prices peaked at $3.227 a gallon in late May. Gas futures have fallen steeply in recent weeks as refineries have ramped up operations.

Refineries are also churning out more distillates, including heating oil. Nymex heating oil futures fell by 5.01cents to $2.0731 a gallon.

Nymex natural gas futures gained 21.5 cents to $6.406 per 1,000 cubic feet. In London, September Brent crude fell $1.51 to $75.54 a barrel on the ICE Futures exchange.