Oil settles down 1.75%, at lowest level in three weeks

Oil prices seesawed in choppy trade on Wednesday, with U.S. crude slipping and Brent paring gains as worries about a global supply glut offset data showing a surprise drop in U.S. crude stockpiles.

Oil prices rallied early, up for the first time in five days, on talk that major producers might try to tackle a glut that had driven prices to 12-year lows.

U.S. crude rose above $29 a barrel after government data showed crude inventories in the country unexpectedly fell by 754,000 barrels in the latest week due to lower imports. Analysts had expected a rise of 3.6 million barrels.

The rally lost steam as attention drifted back to the massive overhang of global crude supplies.

OPEC data pointed to a larger oil supply surplus on the world market this year than previously thought, as Saudi Arabia and other producers in the group pumped more to make up for reduced drilling by non-member countries hurt by lower oil prices.

U.S. crude settled down 49 cents, or 1.75 percent, at $27.45 a barrel and was down 30 cents at $27.64 a barrel by 3:39 p.m. ET, after falling as low as $27.39.

Brent crude rose more than $1 to $31.90 a barrel after the EIA report, but then pared gains to $31.06, up 73 cents from the prior settle.

Traders also noted the record high inventories hit last week at the Cushing, Oklahoma delivery point for U.S. crude futures.

The weak euro added to volatility in oil, as did stronger equity markets after Federal Reserve Chair Janet Yellen's remarks that conditions in the United States allowed for "gradual" rate hikes.

"We believe there's been short covering on the headline and we feel we will continue to see rallies being sold," said Tariq Zahir, crude oil trader at Tyche Capital Advisors in New York.

"Since we are going into refinery maintenance season and coupled with Iranian oil coming into the market, any rally will be short-lived."

Oil's early rally was partly inspired by talk that Iran was ready to negotiate with Saudi Arabia on price support.

Kremlin oil tsar Igor Sechin also proposed producing countries cut output by 1 million barrels per day - without saying whether non-OPEC member Russia would do so.