NEW YORK (CNN/Money) -
Oil prices dropped more than 3 percent on Wednesday after a U.S. government report showed a surprise increase in fuel stockpiles last week in the world's largest energy consumer.
The Energy Information Administration reported that distillate inventories rose 600,000 barrels to 50.5 million barrels last week, sending crude prices to a session low.
Light crude for February delivery fell $1.52, or 3.3 percent, to $44.24 a barrel on the New York Mercantile Exchange, after falling as low as $43.65 following the inventory news. In London, February Brent lost $1.73 to trade at $40.64 a barrel.
Analysts had expected supplies to shrink as recent frigid weather in the Northeast boosted heating demand.
"This time of year you should see draws in distillates," Bill O'Grady, analyst at A.G. Edwards, told Reuters. "We got no builds in heating oil, but all you have to do is keep heating oil steady for the next three or four weeks and you're out of the woods."
Prices remain more than 35 percent up this year, as a surge in global demand and limited spare refining and production capacity triggered waves of speculative buying.
But a generally mild start to the northern winter and a recovery in U.S. crude production from the storm-damaged Gulf of Mexico has helped cut prices more than $11 from their peak two months ago.
The EIA report said commercial crude stockpiles built by 2.1 million barrels to reach 295.9 million in the week to Dec. 17, more than 7 percent above year-ago levels.
The EIA also said distillate fuel inventories rose by 600,000 barrels to reach 119.9 million, narrowing the shortfall to year-ago stockpiles to about 12 percent.
Analysts cautioned that distillate stocks were still low relative to previous years and noted that inventories of heating oil were not building.
Temperatures in the eastern United States are expected to fall below normal over the Christmas holiday, with long-term forecasters calling for a colder-than-normal January and February.
"You still have a sizable year-on-year deficit in distillate stocks, so it's too early in the winter to write off this distillate market," Jim Ritterbusch of Ritterbusch and Associates told Reuters.
In Nigeria, Shell declared a force majeure on 114,000 barrels per day of Nigerian Bonny Light crude, following a community dispute in the restive Niger delta that has blocked some flow stations since Dec. 5.
Traders also are watching developments in the world's two biggest producers, Saudi Arabia and Russia.
A threat by militants last week to attack Saudi oil facilities and Russia's auction of top exporter Yukos' main producing arm to an unknown company served as a reminder of the potential for supply disruptions.
Despite several attacks on foreigners in Saudi Arabia, Riyadh's heavily protected production and export facilities remain untouched.
Traders expect Russia to keep supplies flowing no matter who eventually controls Yuganskneftegaz, sold to mystery bidder Baikal Finance Group at the weekend.
Two Yukos crude export cargoes were canceled this week because the company could not pay port duties.
-- Reuters contributed to the story
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