NEW YORK (CNNMoney.com) - Oil prices fell Wednesday, easing away from record levels, after a government report showed crude supplies rising more than expected.

U.S. light crude for May delivery lost 36 cents to settle at $68.62 a barrel on the New York Mercantile Exchange.

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In its weekly stockpile report, the Energy Information Agency said crude inventories rose by 3.2 million barrels. Analysts had expected a rise of 1.4 million barrels, according to Reuters.

"Crude prices are facing difficult headwinds in terms of the fundamental supply factor," said John Kilduff, an energy analyst at Fimat. "We're nearing record supplies."

Kilduff said crude stocks are within 10 million barrels of the all-time high reached in 1998, when oil traded at a paltry $10 a barrel.

But the drop in crude prices was tempered by distillate and gasoline supplies, which fell far more than expected and pushed front-month gasoline futures up 3.67 cents on the New York Mercantile Exchange.

Gasoline supplies fell by 3.9 million barrels while distillates, used to make heating oil and diesel fuel, fell by 4.2 million barrels. Analysts were looking for a 2.4 million barrel decline in gasoline supplies and a 1.4 million barrel drop in distillate stocks.

The drop in refined products initially caused oil to jump, reaching $69.60 earlier in the session and putting it closer to its record trading high of $70.85, set Aug. 31 in the wake of hurricane Katrina.

While larger than expected, the drop was not unanticipated. Analysts have been saying for weeks that gasoline and distillate supplies will fall as refineries struggle to make a government-mandated switch to cleaner burning fuels.

The switch includes making lower sulfur gasoline and diesel fuel and phasing out MTBE, a chemical additive that has been found to cause cancer, in favor of corn-based ethanol.

Moving to ethanol could be particularly problematic, with government officials saying recently that a shortage of ethanol could lead to spot shortages of gasoline around the country this summer.

That, along with the high price of crude and rising demand from U.S. drivers, has helped push average gasoline prices up 14 percent over the last month.

Gas prices, of course, closely follow crude prices, which have also risen about 14 percent since the beginning of the year, primarily on political uncertainty or outright violence in such major oil-producing countries as Iran, Nigeria, Venezuela and Russia.

But politics is only part of the story. Oil has been on a charge for the last few years, more than tripling in price since the start of 2002.

Big fund money, faced with low global interest rates and a lackluster U.S. stock market, have helped fuel the rise as they chase returns in all types of commodities, including oil.

And fundamental supply and demand has also played a big part as discoveries of new, easily recoverable supplies have failed to keep pace with ever rising demand from the U.S. and developing countries like China and India.

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