Sept. 2 (Bloomberg) -- Crude oil futures were little changed after surging almost $2 a barrel yesterday, the biggest increase in two months, when the U.S. Energy Department reported a bigger-than- expected decline in the country's oil supplies.

Oil stockpiles fell 4.2 million barrels to 287.1 million last week, the lowest since the week ended March 12. Supplies were expected to drop 400,000 barrels, according to the median of forecasts by 13 analysts in a Bloomberg survey. Prices have declined in seven of the past nine sessions on reduced concern that supplies from Iraq would be disrupted.

``Refiners are chewing through a great deal of crude oil,'' said John Kilduff, senior vice president of energy risk management at Fimat USA Inc. in New York. ``In a matter of weeks we've gone from being well supplied to having tight inventories.''

Crude oil for October delivery fell 8 cents, or 0.2 percent, to $43.92 a barrel in after-hours electronic trading on the New York Mercantile Exchange at 8:51 a.m. Sydney time. The contract yesterday rose $1.88, or 4.5 percent, to close at $44 a barrel, the biggest increase since July 1.

Oil prices have declined 11 percent from a record $49.40 a barrel on Aug. 20. They remain 39 percent higher than a year earlier.

The rise accelerated in the last few minutes of trading yesterday when Flint Hills Resources LP, a unit of Koch Industries Inc., had a fire at its refinery in Corpus Christi, Texas. The refinery has a total processing capacity of 300,000 barrels a day, according to the company's Web site.

Supplies Tight

``We came down so much, so quickly,'' said Juha Laiho, a trader with Finnish oil company Fortum Oyj in Houston. ``Prices jumped because the crude number was such a surprise. There isn't a lot of excess.''

Crude oil inventories were up 2.4 percent from a year ago compared with a surplus of 4.6 percent a week earlier, according to the department. Refineries ran at 95.7 percent of their capacity, 1 percentage point higher than during the same period a year earlier, after a 0.3 percentage point decline last week.

Distillate demand in the four weeks ended Friday was 6.9 percent higher than a year earlier. Jet fuel demand was 5.7 percent higher, while gasoline demand was virtually unchanged.

``The supply concerns that have pervaded the market this year are returning to the fore,'' Kilduff said.

The Organization of Petroleum Exporting Countries, which pumps more than a third of the world's oil, has boosted production quotas in each of the past two months in an effort to lower prices.

OPEC Production

The group, excluding Iraq, may have pumped 28.1 million barrels of oil a day last month, or 2.1 million barrels a day more than the quota, Geneva-based consultants PetroLogistics Ltd. said last week. Iraq may have produced 1.8 million barrels a day.

The United Arab Emirates, OPEC's fourth-largest oil producer, would support an output quota rise to ensure adequate supplies for the Northern Hemisphere winter, the country's oil minister said. OPEC will meet in Vienna on Sept. 15.

Quotas ``should increase if it's necessary as prices are still high and we have to ensure stock levels are sufficient for the winter,'' Obaid bin Saif al-Nasseri said in a telephone interview yesterday from Abu Dhabi.

Oil plunged after Shiite militants loyal to Moqtada al-Sadr and government forces agreed to a cease-fire on Aug. 26 in Iraq, easing concern about attacks on pipelines.

Iraq's oil exports fell for a fourth month in August to 1.34 million barrels a day, down from this year's peak of 1.8 million in April, according to data collected by shipping agents. Iraq has the third biggest proved reserves of crude oil.

Rising Forecasts

Merrill Lynch, the world's biggest securities firm by capital, raised its 2004 forecast for the U.S. benchmark oil price, West Texas Intermediate, to $37.70 a barrel. Merrill analyst Michael Rothman also expects the grade to average $42.50 a barrel this quarter, up by $10.50, or 33 percent from the previous estimate of $32.

Barclays Capital, the securities unit of Britain's third- largest bank, reiterated estimates it made a month ago for 2004 prices, which are among the highest suggested by banks and securities firms. Barclays analysts Kevin Norrish and Paul Horsnell forecast the price averaging $42.90 this quarter, $44.60 next quarter and $40.30 for all of 2004.

To contact the reporter on this story: Gavin Evans in Wellington, New Zealand at gavinevans@bloomberg.net

Last Updated: September 1, 2004 19:04 EDT