NEW YORK (CNNMoney.com) - Oil prices fell Wednesday despite the fact that the government said supplies of gasoline rose less than expected.

U.S. light crude for June delivery fell 84 cents to settle $68.69 a barrel on the New York Mercantile Exchange. Just prior to the report's release, oil was down 58 cents.

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The Energy Information Administration, in its weekly stockpile report, said gasoline supplies rose by 1.3 million barrels. Analysts were looking for a 1.6 million barrel build, according to Reuters.

Although supplies came in lower than expected, analysts said the build was still sizable. "Gasoline is the big focus, and we saw a pretty good build," said John Kilduff, an energy analyst at Fimat in New York.

Crude stocks fell by 100,000 barrels while distillates, which are used to make diesel fuel and heating oil, slipped by 100,000 barrels. Analysts were looking for a 500,000 barrel drop in crude supplies and a 700,000 barrel build in distillates.

The EIA report came shortly after an industry study said demand for gasoline and diesel fuel fell last month in response to sharply higher fuel prices.

The American Petroleum Institute, in its monthly statistical report, said gasoline deliveries in April fell by 1.9 percent and diesel deliveries declined by 6.6 percent from the same period last year, which the institute said was a sharp decline.

But the API study runs counter to most other reports so far this year, which have shown strong U.S. demand for gasoline despite near record prices.

The government report Wednesday said gasoline demand over the last month was 0.2 percent higher than the same period last year, and Kilduff said numbers like that will act to keep prices high.

"U.S. consumers just have the pedal to the metal," he said.

The average price for gasoline was $2.929 Wednesday, near its all-time high of $3.06 struck in the wake of hurricane Katrina, according to AAA, formerly known as the American Automobile Association.

Gasoline stocks have been closely watched of late, as high crude prices, refining shutdowns and a switchover to cleaner-burning blends just prior to the high-demand summer driving season have combined to deplete supplies and push up prices.

But most of the switch to cleaner-burning gas has already been made, and refinery output, which was hampered by maintenance following last fall's storms, has come back online.

However, EIA said Wednesday refineries were operating at 89.8 percent capacity last week, which is slightly lower than the prior week's rate of 90.2 percent. Analysts were looking for refineries to be running at 90.8 percent capacity last week.

Oil prices have eased roughly $5 from record non-inflation adjusted highs over the past week, after analysts said the high prices could start eating into demand and hurting economic growth.

But prices remain about 10 percent higher since the start of the year and are still close to the inflation-adjusted highs of around $80 a barrel reached in the early 1980s following the Arab oil embargo and the Iranian revolution.

Geopolitical tensions have been a factor since oil was first discovered, but carry more weight today because Saudi Arabia is pumping at near full capacity and is unable to make up for any supply disruption.

Iran is once again at the forefront of geopolitical concerns, as it tangles with the West over its nuclear program.

On Wednesday, Iran's President Mahmoud Ahmadinejad rejected a possible European offer for incentives, including a light-water nuclear reactor, in return for giving up uranium-enrichment program.

"We don't need incentives," Ahmadinejad said on state-run TV. "They cannot stop our progress by offering us incentives."

Iran has refused to abide by a United Nations Security Council order to stop enriching uranium, which it says is for peaceful power generating purposes. Several nations, including the U.S., France and England, say it is intended to build a weapon.

But any immediate action is unlikely since China and Russia, which are Security Council members with veto status, don't support sanctions against Iran. Iran has also said it would not use an oil embargo as a political weapon.

Still, oil traders are not reassured, and the prospect of confrontation with the country, the world's fifth largest oil producer, is helping keep prices high.

Although geopolitics garner the headlines, they are only one factor that has caused oil prices to triple over the last three years.

Big investment funds, chasing better returns than stocks and faced with relatively low global interest rates, have invested heavily in all commodities.

And supply and demand remains a bedrock cause for price movement: Continued and growing oil use in the U.S. and a newfound thirst from China, India and other developing countries drives demand, while the realization that new discoveries of large, high-quality, easily recoverable oil deposits are probably a thing of the past crimps supply.

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