NEW YORK (CNNMoney.com) - Oil prices lost more than a dollar a barrel Wednesday after the government reported a surprise drop in crude inventories and a buildup in supplies of distillates used in heating.

U.S. light sweet crude for March delivery fell $1.21 to $65.85 a barrel on the New York Mercantile Exchange. Just before the Energy Information Administration released its report, the contract was down 81 cents at $66.25.

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Crude oil inventories fell by 2.3 million barrels in the week ended Jan. 20, compared to estimates for a gain of 1.4 million barrels, according to Briefing.com. But at 319.1 million barrels, crude oil inventories remain well above the upper end of the average range for this time of year, the report said.

Oil futures initially bounced off their lows on the unexpected decline in crude supplies, but then lost ground as traders focused on the larger-than-expected rise in distillate supplies.

"The drop in crude was a surprise and was a little supportive to prices, but the market was completely overwhelmed by the build in products. It's unusual at this time of year to see distillate fuels rise," said Bill O'Grady, an energy analyst with AG Edwards & Sons.

The EIA said distillate inventories rose by 1.8 million barrels last week, exceeding the 875,000 barrel buildup economists surveyed by Briefing.com had anticipated. Distillate fuel supplies, which include heating oil, are above the upper end of the average range for this time of year, the report said.

In Wednesday's report, the EIA also said gasoline inventories jumped by 3.2 million barrels, more than double the forecast 1.4 million barrel rise. Gas stockpiles are in the upper half of the average range.

The last two weeks of fairly significant inventory builds, in addition to mild weather, could help prices pull back a bit, O'Grady said. Last week the EIA reported gains in crude, distillate and gasoline supplies.

"In general prices should go down, but there is plenty of geopolitical fear out there," he added.

Oil prices fell for the second straight session Wednesday, after losing more than a dollar in the previous session. But futures surged to four-month highs last week as tension over OPEC member Iran rose and violence in Nigeria, the world's eighth largest oil exporter, stoked fears of possible supply disruptions.

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