High-flying oil prices sank on Wednesday as a build in tight US crude inventories spurred a rash of profit-taking from crude's fierce recent rally to pre-Iraq war highs.
US light crude lost as much as $1.25 a barrel to $35.41 on initial reaction to the stock build, but settled 86 cents lower at $36 a barrel. In London, Brent crude closed down 95 cents at $32.20 a barrel.
Oil has surged more than $3.50 a barrel, or 12 percent, since the Opec cartel's Feb. 10 decision to cut supply quotas from April and eliminate production "leaks." Some traders had noted the market was ripe for profit-taking.
Prices slumped after the US government's Energy Information Administration (EIA) reported a two-million-barrel build in crude inventories, countering analysts forecast of a draw on stocks.
Crude inventories have now risen more than 12 million barrels from 28-year lows hit in late January to stand at 275.8 million.
"This increase may signify an early start to the crude oil build season, as (stocks) typically increase by more than 20 million barrels between the end of February and the end of April," said the EIA, statistics arm of the Energy Department said.
Downward price pressure also came from the dollar's move to 2004 highs against the euro, yen and Swiss franc, maintaining this week's recovery on rising optimism over US job growth.
Traders have warned that near-record speculative length in the market could melt into a sell-off if hedge funds decide to liquidate their long positions, moving from oil into the rising dollar.
Some traders also attributed the fall in the futures market to news that Saudi Arabia had cut its export prices for the United States in April.
Assurance from Opec President Purnomo Yusgiantoro that members were still pumping above official limits to cool prices has also helped bring prices down from recent highs. Saudi Oil Minister Ali al-Naimi has pledged to keep world oil markets well supplied to sustain economic growth.
Opec oil production dipped only slightly in February, mainly due to export problems from Iraq, a Reuters survey released on Tuesday showed.
Fears of disruptions to supplies from Venezuela, Opec's third-biggest producer, eased when state oil firm PDVSA said on Tuesday that operations were not affected by violent protests by foes of President Hugo Chavez, who are demanding a referendum on his rule.