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Feb. 26 (Bloomberg) -- Gasoline surged 11 percent, passing heating oil for the first time since August 2007, on skepticism that supplies are adequate for demand after refiners cut production before the warm-weather driving season.

Inventories last week were the lowest for the period since 2004, an Energy Department report yesterday showed. Stockpiles fell 7.4 percent below year-earlier levels as refiners operated at the lowest rates since Oct. 3.

“The refiners continue to hold up from cracking gasoline, supplies are nearing a six-year low and that’s a bad place to be going into March and April,” said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida.

Gasoline for March delivery rose 13.37 cents to settle at $1.3004 a gallon at 2:47 p.m. on the New York Mercantile Exchange. It was the highest close since Nov. 13 and the largest percentage gain since Dec. 31.

The front-month contract for gasoline, which expires tomorrow, traded higher than the front-month heating oil contract today for the first time since Aug. 31, 2007.

Gasoline futures have risen 2.5 percent in February and are up 29 percent for the year. Prices are 64 percent lower than the record $3.631 reached on July 11, 2008.

“If demand is going up in February, we should see a continuation in March and April, and that’s the biggest reason for energy prices rallying right now,” Cordier said. “We may see the June contract heading toward $1.50.”

Gasoline for June delivery added 10.23 cents, or 8 percent, to settle at $1.3825 a gallon in New York.

Refiners last week cut operating rates 0.9 percentage point to 81.4 percent of capacity, the lowest rate since the week ended Oct. 3.

‘No Incentive’

“There’s no economic incentive for storing gasoline because supply and demand are very much in balance right now,” said Dominick Chirichella, a senior partner at the Energy Management Institute in New York.

Gasoline consumption, which has fallen as the U.S. economy weakened, rose 1.2 percent last week from the prior week, the Energy Department said. In the four weeks ended Feb. 20, demand rose 1.7 percent from the same period in 2008.

“For the first time since the beginning of the year, there’s this feeling that we’re going to see demand come up a little,” said Ray Carbone, president of Paramount Options Inc. in New York. “But gasoline is such a price-sensitive commodity, and right now it’s in short supply.”

Regular gasoline pump prices, averaged nationwide, fell 0.9 cent to $1.882 a gallon, AAA, the nation’s biggest motoring organization, said today on its Web site.

Heating oil for March delivery rose 5.64 cents, or 4.6 percent, to settle at $1.2941 a gallon in New York. Futures have lost 11 percent this month and are down 7.9 percent for the year.

To contact the reporters on this story: Barbara Powell in Dallas at [email protected]

Last Updated: February 26, 2009 16:53 EST