NEW YORK (CNNMoney.com) -- Oil prices fell amid choppy trading on Wednesday after the government's inventory report dimmed trader hopes that demand is finally rebounding.
What prices are doing: Crude for June delivery dipped 17 cents to settle at $83.68 a barrel.
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Prices had meandered within a tight range for weeks before the fraud charges against Goldman Sachs (GS, Fortune 500) helped send them down 3% on Friday. They were as low as $81.45 a barrel before a spate of strong earnings reports helped push prices back up to levels seen earlier last week.
Though down nearly 2% on the week, oil prices are over 80% higher than they were at this time last year.
What's moving the market: Prices for crude oil fluctuated between gains and losses most of the day, but settled lower after an unexpected jump in inventory dimmed hopes for a rebound in demand.
The Energy Information Administration on Wednesday said that crude oil stocks rose by 1.9 million barrels. Distillates were up by 2.1 million barrels and gasoline stocks jumped by 3.6 million barrels. In the prior week, it reported a surprise 2.2 million barrel dip in supplies.
This surprised analysts who had expected crude supplies to rise by only 300,000 barrels last week, according to research firm Platts. Distillates were expected to jump by 840,000 barrels, while gas stocks were forecast to inch 100,000 barrels higher.
Also helping to push prices down was a stronger dollar, which was up 0.3% against the euro to $1.339, amid continued worries over the Icelandic ash cloud.
A stronger greenback makes crude, which is denominated in the U.S. currency, more expensive for foreign investors. This, in turn, tends to stifle demand and prices.
What analysts are saying: Tom Pawlicki of MF Global cautioned that oil prices could be pressured by decreased demand for jet fuel stemming from the Iceland volcano.
"We believe that such large numbers of lost demand should have adverse effects on oil prices," said Pawlicki, citing estimates of up to 1.2 million barrels of daily demand lost to the volcanic eruption.
The Icelandic ash cloud, which has grounded air travel for days, could also push the dollar higher against the euro as traders speculate that the European economic condition would be weakened by the extended break in shipping and travel.
"The issue doesn't seem to be going away," Pawlicki said. "While European ministers suggested that air travel would soon be resumed, the U.K. warned that another ash cloud was making its way eastward."
Looking ahead: Traders will be looking at the weekly initial jobless claims Thursday. Economists surveyed by Briefing.com forecast a drop of 29,000 in initial claims last week. Many analysts believe that steady improvement in the jobs market will be the only saving grace for oil demand.
They will also be keeping a close watch on new developments around the Icelandic volcanic eruption and international travel. 
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