By Brad Foss
The Associated Press

The price of oil briefly surpassed $35 a barrel Tuesday, then retreated sharply on expectations that upcoming inventory reports would show a small increase in supplies.

With supplies at record lows and another cold spell expected this week in the Northeast, the February futures contract initially rose as high as $35.20 a barrel on the New York Mercantile Exchange. The contract settled at $34.43.

The last time the front-month futures contract settled above $35 was March 14, roughly one week before the invasion of Iraq.

Commercial inventories of crude are at the lowest level since the government began tracking weekly data in 1982 "and probably the lowest since the autumn of 1975," according to the Energy Department.

The department said in a recent report that the country is in "relatively comfortable shape" as far as heating oil supplies go, but that cold snaps such as those that have hit the Northeast and Midwest in the past week are "capable of causing a sharp drop" in supply.

The high price of natural gas also explains the high price of oil this winter, as some utilities and industrial users have the ability to switch to less expensive crude-derived fuels, said Tom Kloza, director of Oil Price Information Service, a Lakewood, N.J.-based publisher of industry data.

Tuesday, February natural gas futures settled at $6.329 per 1,000 cubic feet on Nymex, down 57.7 cents. Phil Flynn, an analyst at Alaron Trading Corp. in Chicago, said Tuesday's decline might have affected oil prices.

Today, the latest government and industry supply data will be released, and analysts expect to see a small increase from the previous week.

"If there's a supply drop, there'll be a panic," Flynn said. "If we see a big build, it will calm some nerves."

For the week ending Jan. 2, commercial supplies stood at 269 million barrels, down from 277.5 million barrels a year earlier.

When U.S. inventories of crude fall below 270 million barrels - the so-called operating minimum - it can trigger reductions in refinery output, according to Larry Alverson, an analyst at the Energy Information Administration, the Energy Department's statistical arm.