April 4 (Bloomberg) -- Crude oil fell in New York after Iran's President Mahmoud Ahmadinejad said that he will release 15 seized Britons, easing concern of a conflict in the Persian Gulf.

Prices surged to a seven-month high last week after Iran seized the sailors and marines in waters separating Iran and Iraq. The standoff has heightened tensions with Iran, which is under United Nations sanctions for its nuclear program. Prices pared losses after an Energy Department report showed that U.S. gasoline supplies plunged for an eighth week.

``There was at least $3 to $4 added to the price of oil as a result of the seizure,'' said Rick Mueller, an analyst with Energy Security Analysis Inc. in Tilburg, the Netherlands. ``This won't suddenly lead to a recovery of Iraqi production or OPEC increasing its output but it does reduce a lot of concern about the flow of oil through the Strait of Hormuz.''

Crude oil for May delivery fell 26 cents, or 0.4 percent, to settle at $64.38 a barrel at 2:50 p.m. on the New York Mercantile Exchange. Futures touched $68.09 a barrel on March 27, the highest since Sept. 6. Prices are down 2.8 percent from a year ago.

Almost a quarter of the world's oil flows through the Strait of Hormuz, a narrow waterway between Iran and Oman at the mouth of the Persian Gulf. Iran has the second-biggest proved oil reserves and is the second-biggest producer in the Organization of Petroleum Exporting Countries.

A Gift

``The great Iranian people and the Islamic republic, despite having the legal right to put these British sailors on trial, will pardon them,'' Ahmadinejad said. ``Their release will be given to the British population as a gift.''

The Britons were still in Iranian hands and officials were determining the arrangements for their release, a spokesman for the British Embassy in Tehran said at 6 p.m. London time. Agence France-Presse cited an aide to Ahmadinejad as telling the state- run Mehr news agency that the handover of the detainees will take place tomorrow.

``Prices won't fall that much because demand is strong and inventories are tight,'' said Phil Flynn, a commodities trader for Chicago-based Alaron Trading. ``We haven't lost any oil from the Persian Gulf as a result of the tensions with Iran. OPEC has cut back production and this is leading to tighter inventories.''

OPEC cut output 190,000 barrels a day to an average 29.88 million barrels a day in March, a Bloomberg News survey of oil companies, producers and analysts showed.

Plunging Gasoline Stockpiles

Gasoline stockpiles tumbled 5.03 million barrels to 205.2 million in the week ended March 30, the department reported. A drop of 150,000 barrels was expected, according to the median of forecasts by 14 analysts surveyed by Bloomberg News. Supplies slipped 9.7 percent in the past eight weeks.

Refineries operated at 87 percent of capacity last week, unchanged from the week before. Gasoline production fell 155,000 barrels to an average 8.77 million barrels a day, the report showed. U.S. refiners usually increase gasoline output at this time of year in preparation for the peak-demand summer months, when motorists take to the road for vacations.

``Refinery runs are terribly low for this time of year,'' said Michael Fitzpatrick, vice president for energy risk management at Fimat USA in New York. ``Refining is the chokepoint, which has been the case the last couple of years.''

Crude-oil supplies surged 4.31 million barrels to 332.7 million barrels last week, the report showed. A gain of 500,000 barrels was expected, according to the Bloomberg survey.

``Crude oil is only down about 40 cents after supplies rose more than 4 million barrels and Ahmadinejad made his speech releasing the British forces, which shows that there is still a lot of strength in the market,'' Fitzpatrick said.

Gasoline for May delivery in New York jumped 8.77 cents, or 4.4 percent, to $2.1054 a gallon, the biggest one-day gain since Jan. 30. Prices surged as high as $2.1143 a gallon on March 30, the highest intraday price since Aug. 10.

Profit Margin

The profit margin, or ``crack'' spread, for turning three barrels of crude oil into two barrels of gasoline and one of heating oil surged 17 percent to $20.6728, the highest since March 20, based on closing futures prices in New York.

The price of Brent crude oil from the North Sea has exceeded that of West Texas Intermediate, or WTI, crude oil, the U.S. benchmark, since Feb. 27. The West Texas grade is delivered to Cushing, Oklahoma.

The closure of a Valero Energy Corp. refinery that's located near Oklahoma has contributed to the spread between the two oil grades. Valero said on March 28 that it won't be able to fully restore production this year at its fire-damaged McKee refinery near Sunray, Texas. The plant had a processing capacity of 170,000 barrels of oil a day before the Feb. 16 fire.

Brent crude oil for May settlement rose 59 cents, or 0.9 percent, to close at $68.40 a barrel on the London-based ICE Futures exchange. Futures touched $69.58 a barrel on April 2, the highest price since Sept. 1.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: April 4, 2007 15:36 EDT