U.S. crude oil futures fell on Wednesday, as a larger-than-forecast rise in refined product inventories last week offset an unexpected drawdown in crude oil supplies.
On the New York Mercantile Exchange, July crude last traded in the open-outcry floor session to its lowest level in nearly three weeks, down $2.01, or 1.6 percent at $122.30 per barrel.
Wednesday's losses added to a more than $3 slide on Tuesday when the U.S. Federal Reserve warned the weakness of the dollar threatened to stoke inflation.
Prices rose briefly after U.S. government data showed a decline in crude inventories.
They soon fell again, responding to increases in stocks such of gasoline, and distillates such as heating oil and diesel.
Both U.S. crude and London Brentcrude were lower.
Data from the U.S. Energy Information Administration showed crude inventories fell by 4.8 million barrels last week.
But gasoline and distillates supplies showed larger-than-expected builds because refineries operated at the highest rate since early January.
"Crude was bullish but products were bearish," a broker said. "Overall sentiment will remain bearish for the moment."
Dollar weakness, which makes dollar-denominated commodities relatively cheap, had been a major factor in oil's rise to a record above $135 a barrel in May.
The high prices have begun to erode demand and have made the cost of subsidies paid out by governments in emerging economies very hard to bear.
India and Malaysia have decided to raised their domestic fuel prices.
India increased petrol and diesel prices by about 10 percent on Wednesday, the biggest increase in years.
Other Asian countries have already cut or are considering reducing subsidies, with potentially major implications for demand.
If demand in Indonesia, Taiwan, Thailand, Malaysia and India fell by 5 percent, that would lower daily crude use by more than 310,000 barrels, the equivalent of two North Sea oil fields' output, said Addison Armstrong of Tradition Energy.
Wednesday's sharp sell-off followed strong selling on Tuesday when U.S. Federal Reserve Chairman Ben Bernanke's warning sent the dollar higher and commodities lower.
"This could signal the end of the surge in dollar-based commodities which have attracted buyers who see it as a hedge against inflation," Robert Laughlin with MF Global said in a research note.