Oil settles down $2.05, or 4.4 pct, after smaller-than-expected US drawdown

Oil prices fell more than 3 percent on Wednesday, extending losses and hitting session lows, after the U.S. government reported a smaller-than-expected crude inventory draw for last week.

Crude inventories fell 2.5 million barrels in the week to July 8, less than analysts' expectations for a decrease of 3 million barrels, the statistical arm of the U.S. Department of Energy said.

Crude futures had fallen earlier after the International Energy Agency (IEA) cautioned that a global supply glut was threatening market recovery.

Distillate stockpiles, which include diesel and heating oil, rose 4.1 million barrels - the largest build since the week ended Jan. 8 and much more than expectations for a 256,000-barrel increase, the EIA said. Gasoline stocks rose unexpectedly by 1.2 million barrels, compared with forecasts for a 432,000-barrel drop.

"A surprising build in gasoline in the peak of U.S. driving season and a very large build in heating oil will set the tone for lower prices as we go forward," said Tariq Zahir, a trader in crude oil spreads at Tyche Capital Advisors in New York. "The products markets will continue to put weakness in the energy complex."

U.S. crude oil and product futures extended losses after the data.

U.S crude oil futures settled down $2.05, or 4.4 percent, to $44.75 per barrel. Brent crude recovered earlier losses, and traded up 0.37 percent, or 17 cents, at $46.43.

Ultra-low sulfur diesel slumped 5 percent. The distillate crack spread, a measure of the profit from refining crude into distillates, touched a one-month low. Brent crude futures fell $2.10, or 4.33 percent, to $46.36.

On Tuesday, American Petroleum Institute (API) reported a surprise crude inventory build of 2.2 million barrels for last week. The API also cited an unexpected rise of 1.5 million barrels in gasoline and 2.6 million in distillates, that include diesel, for the week to July 8.

The IEA, which advises industrialized nations on energy policies, said crude stockpiles kept rising last month, pushing floating storage to the highest level in seven years.

"(Stocks) are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices," the Paris-based group said in a report.

Both benchmarks rose nearly 5 percent on Tuesday for their largest daily gain in three months before trade group American Petroleum Institute (API) reported a surprise crude inventory build.