Oil turns lower as supplies grow

NEW YORK (CNNMoney.com) -- Oil prices turned lower Wednesday after the government said supplies of crude rose far more than traders had expected.

U.S. light crude for August delivery fell 31 cents to $71.10 a barrel on the New York Mercantile Exchange. Oil had traded up 76 cents just prior to the report's release.

Special Reportfull coverage

Oil steady near $73 Oil pares gains, settles lower Oil rises on weaker dollar Oil dips near $72 on stronger dollar Oil climbs nearly 3% on inventory drop Oil rallies after a 9-day retreat

In its weekly inventory report, the Energy Information Administration said crude stocks rose by 3.1 million barrels last week. Analysts were looking for a drop of 300,000 barrels, according to Reuters.

Gasoline supplies, closely watched amid the summer driving season and running low all year, rose by 1.8 million barrels. Analysts were looking for a rise of 300,000 barrels.

Distillates, used to make heating oil and diesel fuel, increased by 800,000 barrels, compared to the 100,000 barrel build expected.

"It's a healthy build, but it's a build that was much needed by the market," said Antoine Halff, head of energy research at Fimat in New York.

Refineries operated at 90 percent capacity, up from 89.4 percent last week, slightly less than expected.

Gasoline demand also slowed, which put further downward pressure on crude and gasoline futures.

EIA said demand over the last four weeks grew 1.2 percent over the same time last year. Normally gasoline demand grows by about 1.5 percent.

Traders have been watching refining activity for the last several weeks, and it has affected both crude and gasoline prices.

More refining activity means more gasoline, which can send down gas futures. But it also means more demand for crude, which can send up oil futures.

Furthermore, traders are increasingly eying distillate stocks ahead of the winter heating season. Pressure to make distillates as well and continued gasoline production are expected to drive up crude prices over the next several weeks.

Refineries have been running at below normal rates all year due heavier-than-usual maintenance and a series of accidents or other problems.

That helped push retail gasoline prices to a record high of $3.227 back in May. Gasoline prices have eased a bit since then, but they still remain near $3 a gallon.

Crude prices have gained over 10 percent in the last month, driven by renewed trouble in Nigeria, expected new production from both OPEC and non-OPEC countries that has yet to materialize, and expectations of more refining activity worldwide. Oil is now just over $6 from its all time trading high of $78.40 set in July 2006.

Stocks of big oil companies, including BP (Charts), Exxon Mobil (Charts, Fortune 500), ConocoPhillips (Charts, Fortune 500), Chevron (Charts, Fortune 500) and Royal Dutch Shell (Charts) have gained along with oil prices, with the AMEX oil and gas index up about 10 percent over the last month.

Global tensions have also contributed to crude's recent rise.

In Nigeria, Reuters reported that a rebel group responsible for a large number of the attacks on the country's oil industry ended a month-long truce, while an attack on a Shell oil rig in the delta served as a reminder of the supply risks there.